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Cognizant’s sharp cut in forecast fells IT stocks

2019 dollar revenue growth seen at 3.9-4.9% vs 7-9% forecast in Feb

May 04, 2019, 09.57 AM IST
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Morgan Stanley said that while some of the issues Cognizant talked about in BFSI and healthcare could be company specific, the IT sector as a whole is expecting a deceleration in BFSI growth.
BENGALURU | MUMBAI: Software exporter Cognizant triggered a sharp decline in Indian IT stocks on Friday after the US-headquartered company said its revenue in the current financial year will grow at about half the rate forecast earlier.

The country’s top five IT companies lost about Rs 38,900 crore in market capitalisation, with their stocks ending down 1-4 per cent. The Nifty IT index fell 1.9 per cent to 16,092.9 points, recording its worst one-day fall since February 20 this year.

Investors punished Cognizant, with the company’s shares down over 11 per cent at $59.13 in mid-morning trade on Nasdaq.

The company expects its 2019 dollar revenue to grow 3.9-4.9 per cent as against the target of 7.0-9.0 per cent growth it had set in February, making it the worst projection in Cognizant’s history.

Cognizant said the change in forecast was due to execution challenges and lower demand in the healthcare and banking businesses, which contribute nearly two-thirds of its revenue. The abrupt downturn has alarmed analysts.

“A 3-4 per cent tweak seems a lot, given that they guided just a little over two months ago,” said David Koning, an analyst with US brokerage Robert Baird.

The Teaneck, New Jersey-headquartered Cognizant, which follows the model of IT services providers with a large offshore base in India, said it is also considering retrenchments to slash costs.

“As part of our realignment program, management is currently evaluating various strategies, including additional employee separation programs. The timing, nature and magnitude of these initiatives are not finalized at this time,” the company said in an earnings release.

In an email to employees, Cognizant CEO Brian Humphries, who took charge in April, said the company had appointed Malcolm Frank as the new president for digital business in place of Gajen Kandiah, who has quit.

Analysts said they were concerned about the weak growth being forecast by Cognizant in its banking and financial services (BFSI) verticals — regarded as the mainstay for the $165-billion Indian outsourcing industry. “The risk to industry growth cannot be denied,” said Kawaljeet Saluja, an analyst with Kotak Institutional Equities. Clients in the capital market segment as well as in US regional banks, have grown cautious about spending on IT services, he said.

However, industry experts feel Cognizant’s challenges are more internal. “There are client-specific issues which led to the guidance cut, and not a system-level issue,” said Amit Khurana, head of research at Dolat Capital Markets. “But the way (Cognizant) has cut its guidance and the commentary that was given by some Indian IT companies is not comforting. So the selling (in IT stocks) may continue,” he said.

Morgan Stanley said that while some of the issues Cognizant talked about in BFSI and healthcare could be company specific, the IT sector as a whole is expecting a deceleration in BFSI growth.

Cognizant chief financial officer Karen McLoughlin said the company will begin cutting costs in line with the slower revenue projections. Last August, Cognizant said it was cutting 200 senior jobs to make way for juniors. In 2017, it had offered employees a voluntary separation programme.

“Over the coming quarters, we intend to bring our cost structure closer in line with our revised revenue expectations while continuing to invest in growth, talent and our portfolio of innovative solutions to speed our pivot to digital,” he said.

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