Cognizant

Cognizant

Cognizant's growth and its rise to the No. 3 spot among IT services providers in Indiais 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," he said.

Shyamanuja Das, editor of Dataquest, echoes that: "The fundamental difference is that, Cognizant's prime focus is growth and not margins." Cognizant maintains operating profit margins at about 17-18%, compared to the 25% or more margins of its Indian peers.

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 Infosysand 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. Post the recession and the big consolidations in the financial sector, US and Europe based BFSI clients have been looking to implement greater cost efficiencies and meet regulatory changes that requires technology spends. Cognizant also has large presence in rapidly growing healthcare and infrastructure management verticals.

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. "PES is important strategically; it also enables a company to build IP and nonlinear growth," said Krishnan Chatterjee, chief marketing officer of HCL Technologies.