With another disappointing quarter from Wipro, the stage is now all set for the ascendancy of the Chennai-based Cognizant Technology Solutions (CTS) into the hallowed group of India’s top 3 IT companies.
The top 3 slot had been occupied by Tata Consultancy Services, Infosys Technologies and Wipro for as long as most people can remember.
The rise of Cognizant — a low margin IT services provider — is also an indicator of the changed “macro situation” in the World after the economic recession that started in 2005.
While, till 2008, the equation between the different IT services providers remained stable, the recession threw everything into disarray.
All of them could expect to grow by around 5% or more very quarter (compared to the immediately preceding quarter,) but the recession forced them to stand still or even witness a decline in revenues.
It was also the time when Cognizant — which has a target of earning around 19% operating margin compared to 30-40% for the ‘Top 3’ — started zooming off the charts. Instead of seeing growth decline, for Cognizant — till then considered a poor cousin of the ‘top 3’ — started growing at 40-45% year on year and 6-8% quarter on quarter.
“Years ago, we made a decision to keep our margin lower than our competitors and invest those dollars into our business. In 2009, we grew substantially faster than others,” Francisco D’Souza, CEO, Cognizant had said last year on his company’s spectacular growth.
Now, with Wipro growing just 0.5% in the June quarter, Cognizant — yet to declare its results — needs to announce a jump of just 2.8% to cross Wipro as India’s third largest IT services provider.
Wipro has posted $1.408 billion as its revenues this quarter, compared to $1.37 for Cognizant last quarter. Cognizant grew 4.6% last quarter and is likely to meet the 2.8% growth challenge for the June quarter.
Both Wipro and Infosys have found it difficult to move out of the ‘recession’ gear that they seem to be stuck in, while TCS has had better luck, posting around 6% growth for the June quarter.
Asked whether he saw the emergence of Cognizant as a signal that customers in the US and elsewhere are focused on companies that offer greater value for money, TCS CEO N Chandrasekaran pointed to his own company’s performance.
Despite the fact that TCS is considered a high margin company, he pointed out that it had just posted more than 6% growth during the quarter. He also pointed out that the growth has not come because TCS lowered its profitability or prices. “In fact, this is the second highest quarterly margin.. Our margins have been on the way up, not down,” he said, dismissing the theory.