Slow growth hint from Cognizant spooks IT stocks

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IT firm says 100% esops for top brass on 16% growth in 2013

IT major Cognizant Technology Solutions has hinted that it would aim at 16 per cent revenue growth for calendar 2013. According to US Securities and Exchange Commission (SEC) filing of the company’s compensation committee report, Cognizant has said that its senior executives would get 100 per cent of their performance stock units if it reached $8.5 billion worth revenue for next year.

The 16 per cent increase in revenue is Cognizant’s lowest projection in recent years and is considered as a sign of tough times for the whole industry. The company that has historically been posting industry-leading growth has projected annual revenue for 2012 to be at least $7.34 billion, 20 per cent higher than the previous year.

It guided 23 per cent revenue growth during the beginning of 2012 and scaled it down to 20 per cent by the end of the first quarter citing tough market conditions. Cognizant’s annual revenue for 2011 increased about 33 per cent, to $6.12 billion. The previous year it grew about 40 per cent to $4.59 billion, compared with 2009.

Cognizant’s lower revenue projection had its impact on the domestic IT shares on Wednesday. They bucked the broad market positive trend and ended weak, triggering fall in the BSE IT index by 1.2 per cent to 5,779.43, compared with 0.2 per cent rise in benchmark Sensex. Infosys Technologies fell nearly two per cent to Rs 2,382.30, Wipro declined 1.8 per cent to Rs 381, HCL Technologies eased 1.3 per cent to Rs 639 and TCS was down 0.1 per cent at Rs 1,297.15.

“There has been a slowdown in IT contracts for several Indian players in 2012 and the scenario may not improve dramatically in the next year as both the US and Europe are still facing challenges,” said Pralay Das, analyst with Elara Securities.

Volume growth may continue to remain muted for some players, he added.

The analyst has a positive rating on TCS and HCL Technologies but negative on Infosys and Wipro. Tough environment in its overseas markets has already forced IT major Infosys Technologies to prune their revenue growth at just five per cent for FY13, much lower than the industry body Nasscom’s guidance of 11 per cent to 14 per cent for the industry.

According to Cognizant’s compensation committee report, its senior executives would get no performance units if the 2013 revenue was less than $8.22 billion, which is about a 12 per cent increase from the minimum projected revenue for this year. They would get 50 per cent of the units if the company’s revenue grew by about 12 per cent. While the top management would receive 100 per cent units if the IT major grew by about 16 per cent, they would get 200 per cent of the units if the company reached $9.17 billion, which is about 25 per cent more than the projected revenue for 2012.

While Cognizant has granted performance units of about 93,000 to chief executive officer Francisco D’Souza for the next year, it has allocated about 50,000 units to president Gordon J Corburn.

Close to 43,000 units have been granted to group chief executive (industries and markets) Rajeev Mehta and about 32,000 units to group chief executive (technology and operations) R Chandrasekaran. Chief financial officer Karen McLoughlin has been granted about 19,000 units and close to 9,300 units allocated for senior vice-president, general counsel and secretary Steven Schwartz. For 2012, Cognizant had decided to pay 100 per cent of the performance units to its senior executives if the company achieved $7.52 billion revenue.

Chandrasekaran told Financial Chronicle in a recent interview: “For several quarters, we have been speaking of the ‘dual mandate’ with which we see our clients grappling. The dual mandate refers to the fact that, on one hand, clients need to drive efficiency and effectiveness as they cope with cyclical economic pressures. On the other hand, they need to invest in innovation and growth as consumers, employees and other stakeholders increasingly demand ever-greater digital experiences based on new technologies. Our discussions with clients at our recently held customer conference, Cognizant Community, though focused on longer-term transformation, gave us a view into more immediate demand.

Clients indicated that though their budget cycles are just kicking off, indications are that the overall IT funding will remain flat in 2013. They also echoed the dual mandate, suggesting that the benefits they accrue from the continued adoption of global delivery models will be used to fund innovation in new capabilities.”

(With inputs from Prasanna Deshpande)

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