Cognizant Technology Solutions Corp. did better than its growth forecast in the third quarter. Constant currency revenues grew 5.1% from the year ago, better than 3.8-4.8% guidance it provided in July.
But for domestic investors looking for takeaways for Indian IT, the results have a cautionary message. Growth rates continue to trend lower. The 2.1-3.1% year-on-year constant currency growth forecast for the December quarter pales in comparison to 8-9% growth the company delivered in the same period in the previous two years.
Of course, the subdued revenue growth guidance for the December quarter is partly attributed to the exit of a business project as part of the strategy rejig by Cognizant. The company will begin to see the impact of revenue loss from current quarter.
Still, the performance in last quarter and the guidance underscores the underlying business challenges. The company’s peers such as Tata Consultancy Services Ltd and Infosys Ltd had also reported a drop in growth rates in Q2.
Cognizant also lowered its full year operating profit margin guidance to 16.5-17.0% from 17%. Along with the results announcement, Cognizant articulated its strategy of optimising its core portfolio while identifying four focus areas for investments. The investments will outweigh the cost cutting exercise weighing on profitability.
The legacy business is facing pricing and renewal related pressures, points out an analyst. Softness is seen in the UK and traditional business in North America. Revenues from top five clients saw a notable fall from the year ago, reflecting subdued spends and weakness in key business verticals. The financial services vertical continues to see client specific issues, though overall growth was decent, thanks to improvement in the insurance segment. Revenues in the healthcare vertical dropped for the second consecutive quarter, reflecting changes in the business environment and insourcing of work by one large client.
However, the management continues to see strong demand in digital areas such as cloud, data analytics, digital engineering, and internet of things, adds the analyst cited above. The management's growth revival plan and the lack of negative surprises may hold investors in good stead. But investors should also note that growth rates are not accelerating either.
The company’s lower-than-industry growth over the past several quarters is attributed to Cognizant specific issues, which the management is trying to address through a new plan.
Even then there is no denying fact that banking and healthcare business segments has been soft for several other IT companies. Successful revival of these verticals remains crucial. “Cognizant has taken a few steps to revive growth in these verticals," analysts at Kotak Institutional Equities said in a note. “New wins, defense of existing business and greater participation in digital spends of clients are key to revive growth in CY2020," they add.