Cognizant performance is great

Cognizant's growth and its rise to the No. 3 spot among IT services providers in India is viewed by some as exceptional. The fact is, it is exceptional compared to the two laggards in the business -- Wipro and Infosys. But compare it with TCS, HCL, and the more recent performances of midsize companies like Hexaware and KPIT Cummins, and you will find that Cognizant is only as good as the best.

Even in the latest quarter, TCS and Cognizant's revenue growth was the same; TCS's profit growth was faster. While Cognizant's revenues have grown faster than HCL, it lags HCL in profit growth.

Ankur Rudra, IT analyst at brokerage firm Ambit Capital, said that Cognizant's relatively nimble organization structure and larger investments in sales and marketing must be credited for its fast growth. "It keeps its margins low and continues investing in sales - it did that even during the recession -- which has enabled it to build good client relationships and grow fast."

But margins can only be a partial explanation because companies like TCS and HCL that maintain higher margins have also been able to maintain industry leading growth.

An industry analyst who did not want to be named said the timing of Cognizant's growth over the last 2-3 years has added sheen to its strong financial performance. It came at a time when Infosys and Wipro were undergoing restructuring exercises that slowed their growth.

Cognizant has also benefited from its huge focus on the banking, financial services and insurance (BFSI) space, which accounts for over 40% of its revenues, unlike a Wipro that has only 26% of its revenues from the segment. Srishti Anand, IT sector analyst at Angel Broking, said that the IT sector growth in recent times has been led by spends from the BFSI vertical.

But some of these very factors could become its Achilles heel. The dependence on BFSI could become a liability if the sector slows down, and there are signs of that already in the global economy. Unlike its peers, Cognizant has no presence in product engineering services (PES) that now contributes significantly to the revenues of companies like Wipro and HCL.

HCL Technologies: Profit jumps

HCL Technologies Ltd. Wednesday beat market expectations with a 52% increase in quarterly net profit, aided by a foreign-exchange gain compared with a large hedging loss last year, but its shares fell as sales growth slowed sequentially.

The company has been outperforming the information-technology industry over the past few quarters in revenue and volume growth. Its results come after all three of its larger local rivals--Tata Consultancy Services Ltd., Infosys Ltd. and Wipro Ltd.--cautioning about weak economic situation weighing on their business performance.

Based on U.S. accounting standards, HCL Technologies posted a consolidated net profit of 5.11 billion rupees ($115.3 million) in the April-June period, compared with 3.37 billion rupees a year earlier and 9% more from the quarter ended March 31. The average of estimates in a poll of 29 analysts was for 4.93 billion rupees.  

It recorded a 83 million rupees forex gain, compared with a forex loss of 1.35 billion rupees a year earlier when hedging bets misfired. In the January-March period it took a 112 million rupees forex loss.

Sales climbed 28% from a year earlier to 43.00 billion rupees, slightly missing the market estimate of 43.30 billion rupees. Sales rose 3.9% sequentially, slower than the 5%-10% quarter-on-quarter growth HCL had posted during the rest of the fiscal year.

HCL's shares were trading down 2.3% at 503.00 rupees midday on the Bombay Stock Exchange, where the benchmark index was down 0.5%.

HCL's revenue growth over the past year has helped it narrow a valuation gap with its major rivals, CLSA Asia Pacific said. However, the latest quarterly report is somewhat of a set-back on that front, the house added.

Its earnings margin before interest, tax, depreciation and amortization widened to 18.5% from 17.3% in the third quarter, helped by lower expenses. But it was lower than the 18.6% margin reported a year earlier.

CLSA expects HCL's profit margin to be under pressure in the near term as the company is likely to raise staff salaries in the July-September period, its first fiscal quarter.

In the past quarter, HCL added 70 new clients, the most by a company in the sector during April-June. It hired 3,626 people on a net basis during the period, taking its employee count to 77,046 at the end of June.