Cognizant overtook Infosys in 2012 to become the second-largest IT services company in terms of revenue, in what was a seminal moment for the Nasdaq-listed firm that was founded more than a decade after Infosys.
Now, a decade later, Infosys is all set to reclaim its lead over Cognizant, as the latter's underperformance in recent quarters has allowed Infosys to bridge the gap.
In a note, Kotak Institutional Equities said there is not much read-through for other Indian IT services companies from these results, a departure in tone from when Cognizant was considered a barometer for the sector.
Infosys coming close to Cognizant’s level of growth reflects the latter’s troubles as it faced execution challenges and underperformed as compared to its peers, despite the pandemic leading to significantly increased demand.
Last quarter, Cognizant chief financial officer (CFO) Jan Siegmund said the company has been absent from large and mega deals, which slowed down the company’s revenue growth.
According to Kotak Institutional Equities, Infosys is catching up with Cognizant in size, with just a 6 percent difference in revenues. Over the last eight quarters, Infosys has steadily increased its revenue.
“CTSH has enjoyed a comfortable lead over Infosys in revenues. That lead is narrowing, with the gap in revenues between the two companies down to just 6.6%. Infosys’ quarterly revenue run-rate of US$4.555 bn is just US$300 mn away from CTSH’s revenues,” the note by analysts of Kotak Institutional Equities said.
“We would not be surprised if Infosys reclaims revenue leadership over CTSH in the coming quarters,” it added.
Infosys’ market capitalisation was at $78.98 billion as of November 2, as opposed to Cognizant’s $31.20 billion.
In terms of headcount addition, Cognizant had over 40,000 more employees than Infosys eight quarters ago — the quarter ending December 2020.
The war on talent led to a considerable uptick in hiring across the industry as demand far outstripped supply, but with Cognizant seeing attrition levels over 30 percent, including a significant percentage in involuntary attrition, Infosys is now just short of 3,800 employees when headcounts for the quarter ending September 2022 are compared.
Cognizant pared its revenue growth guidance for the second consecutive quarter, now at 7 percent from the previous estimate of 8.5-9.5 percent. At the start of the year, it had guided for 8.5-11.5 percent.
“We are revising our full-year guidance downward, which reflects headwinds from currency, lower North America billable headcount, which we expect to take several quarters to improve, and softer-than-expected bookings growth,” Chief Executive Officer (CEO) Brian Humphries said during the company’s call with analysts.
In contrast, Infosys had raised the lower end of its revenue guidance for the year — from 14-16 percent to 15-16 percent.
As compared to the tone of Humphries, Infosys CEO Salil Parekh was upbeat: “Our H1 performance of 20.1% growth in constant currency and robust large deal signings in Q2 gives us the confidence to change our revenue growth guidance, which was at 14% to 16% earlier to 15% to 16%, even as we are seeing emerging concerns,” he said.
Cognizant's operating margins have been improving, but Infosys', despite a decline, remains healthier.
Kotak analysts also pointed out that financial services is a key vertical for all companies, and Cognizant has been losing share in large banking accounts. “Growth in key verticals—financial services and healthcare—has slowed down to low-to-mid single digits,” it said. Revenue from financial services declined sequentially by 1.4 percent for Cognizant.
Parekh of Infosys called out some softness in mortgages as part of the financial services vertical. “Growth in Financial Services segment continues to be strong backed by large deal wins, account expansion and new account opening,” he had said.
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