Cognizant Weathers Storm Better than Wipro

The current economic slowdown has hit the IT industry quite hard resulting in lower to negative growth rates, pricing pressure, project delays and cancellations, and a volatile currency exchange environment. Companies in financial services, manufacturing, and retail industries account for a major portion of total outsourced business for IT companies and are suffering from bankruptcies and consumer confidence is shaken.

This has led to a slowdown in IT services. Moreover, the volatility in exchange rates has badly hurt the top line for most service providers.

Amidst all this, Cognizant Technology Solutions (CTSH) (Analyst Report), leading provider of custom information technology (IT) to Fortune 1000 customers, seems to have weathered the storm compared to its Indian peer Wipro Ltd (WIT) (Analyst Report) which is roughly double in terms of size and scale of operations.

On a trailing twelve month basis, WIT lagged CTSH both on account of gross margins and operating margins. Cognizant has a significant offshore presence. Almost 75% of the company’s employees are located in India; its domestic presence is also significant. As a result, Cognizant’s business culture is a blend of India and the West. This flexibility appears to be helpful in penetrating the accounts of global corporations.

Cognizant’s Q2 revenue guidance implies a 2% sequential growth, while all other companies in the sector have guided to a sequential decline. The full-year revenue guidance also reflects a 10% y/y growth and the company appears “confident” in reaching that goal. The company also stated that it is seeing signs of stability among its banking clients and business discussions with clients are picking up steam.

However, the sector is yet to see substantial bookings. We feel encouraged that CTSH has better visibility going into Q2 and maintain a Hold on the stock.

Comments

[Mad Hedge F...:]

Nice update. Regular followers of this letter know that I have been a huge bull on India since the beginning of the year (see my last update at www.madhedgefundtrader... ). After doubling since November, the Bombay Sensex index has backed off 15%, along with the global risk reversion trade. The immediate road may be a rocky one as the new government brought in by the Congress Party’s smashing May win imposes some Obamaesque changes on the economy. That means a lot more borrowing and higher inflation. For a quick snapshot of the state of play in India, please read Martin Hutchinson’s excellent piece at Money Morning. (at www.moneymorning.com/2.../)

Jul 15 05:07 PM