Cognizant set to be No. 3 IT co

IT major Cognizant is all set to replace Wipro to become the country's third largest IT services provider when it announces its results on August 2.

Wipro on Wednesday reported IT services revenues at $1.408 billion for the April-June quarter. This is about $40 million less than Cognizant's April-June quarter revenue guidance of $1.45 billion.

JP Morgan analyst Tien-tsin Huang, in a report on Cognizant dated July 15, drew a revenue estimate of $1.46 billion for the company in the April-June quarter. Huang expects an upside in revenues because of Cognizant's track record of reporting premium growth in the June quarter and its more favorable regional mix (larger proportion of North America). Cognizant's $1.45 billion April-June guidance is also greater than the lower end of Wipro's July-September revenue guidance of between $1.436-1.464 billion.

The underlying business fundamentals for the IT sector are healthy as the recently announced strong quarterly earnings of TCS, IBM and Accenture suggest. Therefore, Cognizant is expected to meet if not beat its guidance. The weakness that Infosys's and Wipro's results exhibit is more a reflection of company-specific issues as against market fundamentals.

Ankur Rudra, IT analyst at Ambit Capital, said that historically Cognizant has given a conservative guidance and has a good record of beating it. "There is a good momentum to their business with some good client wins. They are likely to surpass Wipro's revenues in the April-June quarter," he said.

Srishti Anand, IT sector analyst at Angel Broking, said that they forecast Wipro to grow at 13.5% for the 2011-12 fiscal. Cognizant, which reports on a calendar year basis, is expected to grow at around 29% to $5.92 billion in 2011. "This means that Wipro will not be able to catch up with Cognizant in the foreseeable future," she said.

Given the expectations of a April-June quarter upside, JP Morgan analyst Huang estimates that Cognizant could increase its calendar year 2011 revenue growth guidance to over 31%. "We see very little downside to current guidance of 29% + even if the macro environment deteriorates to the extent it did in late 2008/ early 2009," the report added.

In the April-June quarter of 2008, Cognizant trailed Wipro by $383 million in revenues. Analysts say that Cognizant's focus on faster growth rates and market share gain with lower margins has helped it close the gap with Wipro. It invests significantly higher than its peers in sales and marketing and employs a larger proportion of highly qualified MBAs.

In 2010-11, Wipro revenues grew at 18.9% to $5.2 bn, while in calendar year 2010, Cognizant grew 40% to $4.59 billion.

Over the past few quarters Wipro has been struggling to grow on a par with its top-tier peers. The company has blamed it partly on its complex organizational structure, which has recently been revamped. The company has done away with the joint-CEO system, simplified its organizational structure and narrowed its vertical focus.

Wipro CEO T K Kurien on Wednesday said that because of the organizational restructuring, the company could take another two-three quarters to stabilize and return to industry level growth rates.

The company's portfolio of offerings is also less skewed towards growth areas as compared to Cognizant. Wipro has a relatively lower exposure to high-growth segments like consulting and systems integration and strong verticals like banking financial services and insurance.