Trends Affecting Cognizant Vs. Wipro And Infosys

Includes: CTSH, INFY, WIT
by: MarketGyrations

CTSH has underperformed relative to its competitors INFY and WIT.

Revenue growth at INFY and WIT has increased unlike CTSH, but that might be about to change.

A number of factors could combine to make business difficult for companies like CTSH, INFY, and WIT.

The outsourcing and offshoring industry has become an integral part in today's world. Of all the companies involved in the industry, Cognizant Technology Solutions Corporation (CTSH), Wipro (WIT), and Infosys (INFY) are three that are among the biggest. These three compete directly with one another for service contracts all around the world.

If we look at how the stocks have behaved, we can see that CTSH has underperformed compared to its two competitors. Of the three, INFY has done the best. While CTSH has recovered to a certain degree in 2019, it is still down over 13% from where it was one year ago. The chart suggests that CTSH may still be in a downtrend. The charts for INFY and WIT look relatively better.

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Cognizant is slowing, while Infosys and Wipro are improving

If we look at how the companies have performed, we can see from the table below that revenue growth at CTSH is showing a worrying trend by slowing down. While CTSH continues to grow, revenue growth has declined in each quarter. This is a cause of concern if this trend continues. Growth is highly valued in today's global environment and CTSH losing it would be a major loss.



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Source: CTSH

On the other hand, INFY shows a much better trend. Here revenue growth is not slowing down, but actually accelerating. WIT also displays a similar trend. Both INFY and WIT seem to be improving, while the opposite can be said of CTSH. It's probably no surprise that consensus is down on CTSH. Q1 2019 EPS estimates for CTSH have been trending down and the overall outlook for the company seems negative.



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Source: INFY



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Source: WIT

Is there a turnaround in store for Cognizant versus Infosys and Wipro?

The current trend where CTSH has slower revenue growth and its competitors faster growth is the reason for the former to be concerned. However, there are signs that things could turn around for CTSH relative to INFY and WIT. Both INFY and WIT could see their revenue growth go down if these developments come to pass. This will, in turn, affect their stock.

The first development is that the dollar is getting stronger as we can see from the chart below, especially versus European currencies like the euro. The euro could fall even further with the recent announcement from the European Central Bank that they will launch a new TLTRO program in September 2019 until March 2021 to help banks obtain cheap loans.

usd index chart

In addition, interest rate hikes will be postponed for even longer than expected. A weaker euro will hurt INFY and WIT more than CTSH due to the former two deriving much more of their revenue from the affected regions as the table below indicates. A weak economy in Europe will also have an impact on companies that do business over there as fewer contracts may be awarded when the outlook is dim.

All these factors could combine to help CTSH outperform INFY and WIT on a relative basis. Recall that companies have to report their top and bottom line in U.S. dollars. If the exchange rate of a foreign currency versus the dollar goes negative, then companies that earn revenue in foreign currencies will also see their revenue negatively impacted.

CTSH should be less affected by this in comparison to its competitors INFY and WIT. CTSH should benefit from having a large part of their revenue coming from the U.S., which has an economy that is stronger than other places like Europe. If an economy is strong, then companies that do business there should reap the benefits. The reverse is also true.




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The Trump Administration is going after the offshoring industry

CTSH may be in a better position compared to INFY and WIT with a strong dollar due to its greater exposure to the U.S. market, but the situation is the reverse when it comes to government policies that could affect the offshoring industry. While companies such as CTSH have taken measures to increase the number of locals they employ, the fact remains that CTSH, INFY, and WIT tend to rely heavily on foreign workers. A portion of which is in the U.S. thanks to temporary work visas that are issued by the U.S. government.

Donald Trump has publicly stated to be firmly against the process of offshoring and intends to take action to bring back jobs to the U.S. that have moved overseas. This could include the introduction of regulations that restrict the ability of companies like CTSH, INFY, and WIT to do business as they are used to. A number of government policies have already been enacted that make life harder on foreign workers in the U.S.

The number of work visas issued to offshoring companies like CTSH, INFY, and WIT could be restricted or the terms under which they are issued could be changed to make it harder to make proper use of them. It depends on how far the Trump Administration is willing to go, but restrictive government policies could have a far-reaching impact on companies that rely on outsourcing and offshoring.

In this scenario, CTSH has more to lose than INFY and WIT because it derives a greater portion of its revenue from the U.S. market. Companies could try to mitigate the impact by hiring more local workers instead of foreign workers, but the problem is that this raises their costs. They then have to pass their increased costs onto their customers, which, in turn, reduces the attractiveness of outsourcing.

Remember that the primary reason to outsource is to lower costs. If outsourcing no longer delivers any cost savings, then there is no reason to go that route. There will be fewer contracts available, which means less revenue for outsourcing companies. If companies like CTSH, INFY, and WIT are forced to spend more on labor, then this will lower their margins and hence profitability. Either way, the current trend of the Trump Administration making life harder on companies like CTSH, INFY, and WIT looks to be a major headwind going forward.

The Trump Administration could start a trade war with India

In addition, Donald Trump could expand his current trade war with other countries by including India. This should be a concern for CTSH, INFY, and WIT because all three have a heavy presence in India in terms of the large number of people they employ in India. Although there is no real trade war yet between India and the U.S., there are recent reports that Donald Trump may be moving in that direction.

Donald Trump apparently dislikes some of the policies that the government of India carries out. In order to extract concessions from India, Trump could decide to target those companies that contribute heavily to the Indian economy, which include CTSH, INFY, and WIT. This should be of concern to the companies involved.

The current global environment does not favor CTSH, INFY, and WIT

While offshoring has taken off in recent years, there are signs all around the world that the practice is increasingly getting frowned upon. Many governments want companies to give priority to local workers instead of foreign workers. In places where the economy is weak and jobs are hard to find such as Europe, the demand to hire local workers will only get increasingly stronger.

The politics are simply against the hiring of foreign workers in many countries. With Donald Trump in the White House, companies that offshore have become much more of a risk. Technically, Trump could at any time send a tweet that causes the stock of these companies to go down in a hurry. This is a major headwind for companies like CTSH, INFY, and WIT that have risen thanks to outsourcing and offshoring, in particular.

While the outsourcing and offshoring industry is probably here to stay, it is likely that the days of fast growth for companies that offshore are now behind us. At least, for as long as Donald Trump is in office. If this is accurate and revenue of companies like CTSH, INFY, and WIT stagnate due to governments limiting their ability to do business, then these companies are probably best to avoid. Too much risk involved.

Source: Wikimedia Commons

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.