Why I'm Long Cognizant, Short Infosys

Cognizant (CTSH) has historically gone 10%-20% faster than Infosys (INFY), and continues to do so - if we go by the guidance of the two companies for 2009. Until last year, its stock was trading at substantial premium to INFY. Since then, the differential collapsed. In the last two weeks, INFY has been trading at 10% premium to Cognizant. My guess is that the Indian markets are on a tear and are pulling Infosys India stock along, so the INFY ADR is duly obliging. However, Cognizant is not listed in India. So CTSH doesn't have something similar pulling it forward.

Whatever factors impact INFY will impact Cognizant to the same degree. If tech spending recovers, INFY will benefit, and so will Cognizant. Rupee appreciation hits both. US protectionism hits both. Amongst the Indian outsourcing companies, CTSH probably does the best quality of work - if one were to go by the number of IIM grads that chose CTSH over INFY, Wipro (WIT) or TCS.

Cognizant has grown faster than INFY in the past, and it will grow at least 10% faster than INFY in 2009. I think CTSH will again start trading at a 10%-20% premium to INFY after another two quarterly reports. INFY will report next in mid-July and Cognizant in August. So CTSH will problem reassert its premium by October or November.

Disclosure: Author is long CTSH and short INFY

Comments

[User 396411:]

the number of IIM grads in each co is an incorrect proxy- these are different because of the recruitment strategy of each company... Cognizant is heavy on selecting IIM grads for its client facing/ sales teams

Jun 03 01:49 AM

[GG:]

That is precisely why Cognizant is growing faster - they have better quality people to interact with clients. All Indian tech companies want to move into consulting. While Cognizant is way behind Accenture, it is probably a couple of steps ahead of Infosys and TCS.

Jun 03 03:20 AM

[Bandwagon2009:]

Not sure I buy this. CTSH is growing faster from a smaller base -- and most likely taking share from some smaller players like PTI or SAY. I am not convinced that the growth rate will continue over the long term as market penetration gets a bit higher.

In my personal experience Infosys has a better more respectable brand and client satisfaction levels.

Infosys will however suffer if they do not get aggresive about building newer services like Infrastructure and also in their hiring of locals.

Jun 03 09:51 AM

[GG:]

CTSH will have $3bn revs by end of 2009 while Infy will be at $4.5bn. So Infy is just 1.5x of CTSH, not 10x where the low base faster growth argument would be applicable.

Jun 04 01:05 PM

[Sujeesh:]

When Infosys was growing the concept of offshoring wasnt been accepted or been tasted by most of the clients, so they had stuffs to research and then prove it to the world... but when CTS was growing the offshoring has been already proven, so it was matter of who wins the bid i feel...

Raj

Jun 08 11:57 AM