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The US-listed Cognizant has done it again. For the latest September quarter, its revenue growth rate, at 22 per cent year-on-year, is head and shoulders above those for its India-listed rivals.
In fact, the company has equalled or bettered numbers from rivals such as TCS and HCL Technologies consistently for the past three-four years.
Apart from an inorganic thrust, Cognizant’s fast-paced growth has been due to a set of factors playing out. The company’s predominantly North America-focused operations, a service-mix in favour of less-discretionary application services, and entrenched presence in verticals such as healthcare and insurance may be the key reasons.
Being North America-focused has played out well for the company. It has also been quite aggressive on the margin front while bidding for new deals. Unlike Infosys and Wipro till recently, Cognizant has also had stable leadership, which has helped the company stay focused on its chosen strategy and manage well the challenging times, an aspect where TCS too has done exceedingly well.
US focused
Cognizant derives more than 77 per cent of its revenues from North America, which is a clear 15-20 percentage points more than what TCS, Infosys, HCL and Wipro derive from the region.
North America is the largest outsourcing geography and was also the first to recover from the 2008 financial crisis. IT spends have grown steadily in the region, translating into strong numbers for Cognizant. The company also relies to a far lower extent than its competitors on Europe, where the economic recovery has been slow to take off. In terms of offerings, nearly half of Cognizant’s revenues are generated from delivering application development and maintenance (ADM) services, again much higher than the 30-40 per cent levels for peers.
ADM is a bread-and-butter service not very vulnerable to cuts in discretionary IT spends.
In terms of verticals, a strong presence in healthcare and insurance has helped the company stay ahead in the race. It focused less on retail and manufacturing compared to Infosys and TCS. The company has won deals from the US Government in the affordable healthcare initiative, when most Indian vendors chose to stay away. The healthcare segment contributes nearly a fourth to its revenues.
Inorganic thrust
Cognizant has done a series of acquisitions over the past decade or so that have helped it grow inorganically as well. In the past three years alone, the company has acquired seven companies, including BPO/KPO operations of financial institutions based in Europe. The deal sizes have generally been in the $40-100 million range and the integrations have proceeded smoothly. This contrasts with Infosys which has taken a far more cautious approach to acquisitions.
Cognizant has been more aggressive than its peers on the margin front while chasing deals, especially with respect to large contracts coming up for renewals. Its operating margins of 19-20 per cent are a good 3-10 percentage points lower than TCS, HCL and Infosys.
With quite a few factors in its favour, it is no surprise therefore that Cognizant should take rosier view of the current year than its rivals.
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