Sunday, 15 February 2009

Cognizant signals 10% growth in 2009

(By Anthony Miller). What everyone was waiting to hear from Cognizant’s Q4/FY08 results on Friday had little to do with FY08 – the company had firmly set market expectations for those numbers. What we really wanted to know was management’s guidance for 2009. And the answer is ... 10% revenue growth and broadly flat margins. I must say, in the current economic climate it’s a pretty bold move to put a stake in the ground so far out when most other players are reeling their lines in (to mix a metaphor or two). Just a few of days ago, Capgemini said they can’t see business with any real confidence beyond June, guiding towards a ‘modest’ 1H09 revenue and margin decline.

Cognizant’s revenue guidance number is also interesting in that it includes a near-2% sequential revenue decline this quarter (i.e. to March) much as did Infosys. This is mainly because of the ailing banking sector, about 30% of Cognizant’s business. Even so, this would still give them 14% yoy growth in the quarter, hardly sluggish. Management expects its banking business to pick up again from Q209, which frankly I feel rather nervous about. However, when I ran the numbers, the guidance implied that aggregate revenue growth for the 9 months Apr. – Dec. ‘09 would need ‘only’ be 9% yoy, which is hardly outlandish by Indian SI standards. Nonetheless, as no one else (let alone us) is yet prepared to ‘call the bottom’, there’s still plenty of room for ‘surprise’ – in the worst sense.

Cognizant is traditionally the fastest growing Indian SI – indeed its 32% FY08 growth comfortably outstripped Infosys over the same period (+20%). Clearly a 10% growth call is hugely downbeat compared to what they are used to. But it’s hugely upbeat compared to our expectations for the marketplace (i.e. negative). If there is no further deterioration in global economies then we’d say Cognizant’s 10% growth is not impossible. But we just don’t think that’s the case. Indeed, management concurred with views from Indian peers that even where IT budgets had been ‘fixed’ they are still flaky and would be cut again if things get worse.

Indian offshore IT/BPO industry association Nasscom is forecasting 15% cagr offshore services growth in FY10 and FY11 (see our comment here) based on 16-17% growth this fiscal year (to March ’09). As I said then, this is also not impossible but it does look optimistic. But however it pans out, we still expect Indian SI growth to beat local players’ hands down, Satyam or no Satyam!

And for the record, Cognizant finished the year with $2.8bn in revenues, of which about $540m came from Europe. We estimate Cognizant’s UK business represents about two-thirds of Europe.

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