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How Cognizant spooked Indian IT Sector

Cognizant Technology Solutions in a filing to SEC said it would pay its top executives 100% of equity incentives if the company’s topline grows by 16% in 2013, against its estimated growth of 20% this year. Investors here saw this as a bad omen of Indian IT sector and IT stocks fell, leading to a spate of dismal headlines in newspapers today. Tech stocks slip as Cognizant hints at slower growth (Business Line); Cognizant hints at 16% growth in ’13 | Shocks Indian IT services industry (Business Standard); Cognizant executive pay in 2013 hints at 16% revenue growth | The suggestion of slower revenue growth from Cognizant could reflect a challenging year ahead for IT industry (Mint); Cognizant Sends Tremors Via US Filing (Economic Times)

This reaction is based on two assumptions. One, the performance of Cognizant is a good indicator of how IT industry will perform, and two, the performance targets of its top executives is a good indicator of Cognizant’s actual revenues.

Let’s take it one by one.

Cognizant is known to outpace the market by a good margin. In the last four years, Cognizant outpaced the industry exports growth by 10-26 percentage points, and total revenue growth by 13-24 percentage points. (Since Nasscom gives April-March numbers, and Cognizant follows calendar year, I have added Cognizant’s quarterly numbers to sync with Nasscom’s).

 

 

Two questions, based on the graphs above and below, explain why the market got so jittery.

If Cognizant grows only by 16% next year, will the industry grow in single digits?

Alternatively, even if Cognizant does not outpace the industry by big margins, wouldn’t lower growth drag the industry down, by the virtue of its size? Its revenues were 5% of industry exports in 2008, and now it’s close to 10%.

 

 

 

But the problem with this analysis is, it means nothing if the second assumption – the correlation between performance targets and the annual revenues – is shaky. On surface, they seem to go in the same direction.

 

But this graph is based on just three years’ data, and and therefore  misleading. To get a better picture we have to look at the absolute numbers

 

Consider column four. In the last three years, the revenues were off by 20% one year, by 8% in the next and by 3% – in the opposite direction – in the other. The sample is too small and it’s too varied to come to any useful conclusion. In short, the actual numbers can go any way, depending on the demand.

So, what’s the outlook for demand?

Interestingly, there are several positive indicators. Consider the two slides below. They are from a presentation Sudin Apte, CEO of Offshore Insights gave recently after he surveyed IT and business decision makers in US and UK.

 

 

Again, in a story last week, DNA quoted Rishi Jhunjhunwala, an analyst with Goldman Sachs. The story said Jhunjhunwala is betting on a percentage-point improvement in the  IT budgets of companies next year based on a global survey of chief information officers. “This will be driven by better bottom-up growth in US technology and emerging markets,” he told DNA.

A more recent story in Mint suggested that the industry will grow in double digits in 2013. It quoted Subroto Bagchi of Mindtree: “The election of President Obama has settled a lot of speculation, we think the US is back on growth track, and it will have its implications on other parts of the world as well.”

It’s safe to say, the demand will not be worse than it was this year.

So, what’s a good way to read Cognizant’s 8-K filing?

I think we should read it for what it is – something that tells us about the incentives the board designed for the top managers so that they perform better. Last year the board offered Cognizant CEO Francisco D’Souza 95,400 performance units to achieve 100% of revenue target. This year, that number has actually come down to 93,113 units. But, there is one way Francisco can double this. He has to grow the revenues by 25%, which he has done, pretty comfortably, in both 2010 and 2011.

On Nasdaq, Cognizant stock went up by 3.89% yesterday.

 

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Cognizant is going to declare only 80%-90% of 2012 incentives for most of the employees. In al previous years, Cognizant declares 150-200% incentives

Pingback: Cognizant Technology Solutions News: COGNIZANT TECHNOLOGY SOLUTIONS CORP : Cognizant to Acquire Six ... - Stock News Net

Cognizant dream run over. You will see bad forecast year on year from now.
lets see how it pans out.

Pingback: Cognizant filing stokes Indian outsourcer growth fears | Business Blogs and News

Pingback: Cognizant filing stokes Indian outsourcer growth fears | Algesr

Hmmmmmmm...............Need to keep an eye till the result of First Quarter 2013.

Pingback: Cognizant filing stokes Indian outsourcer growth fears • The Register | Up to the hour news

 
 
NS Ramnath
I have been with Forbes India since August 2008. I like writing about ideas, events and people at the intersection of business, society and technology. Prior, I was with Economic Times. I am based in Bangalore. Email: ns.ramnath@gmail.com
 
 
 
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February 27, 2013 08:02 am by Biswajit
Cognizant is going to declare only 80%-90% of 2012 incentives for most of the employees. In al previous years, Cognizant declares 150-200% incentives
December 26, 2012 08:36 am by Cognizant Technology Solutions News: COGNIZANT TECHNOLOGY SOLUTIONS CORP : Cognizant to Acquire Six ... - Stock News Net
[...] estimated growth of 20% this year. Investors here saw this as a bad omen of … Read more on Forbes India (blog) Related Stock NewsExxon Mobil Corp. News: 3 Things Exxon Mobil Should Do To Maximize Shareholder [...]
December 21, 2012 11:23 am by rahul
Cognizant dream run over. You will see bad forecast year on year from now.
December 13, 2012 06:20 am by ThinkingGuy
lets see how it pans out.
December 08, 2012 06:51 am by Cognizant filing stokes Indian outsourcer growth fears | Business Blogs and News
[...] Adding to the potential gloom is the fact that Cognizant has been one of the best performing Indian tech firms in recent history, outpacing the industry by at least 10 per cent over the past four years, according to Forbes. [...]
 
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