Cognizant adds more business in 2015 than TCS, Wipro, Infosys combined

Bengaluru: Cognizant Technology Solutions Corp. has done more business or added more incremental revenue in calendar year 2015 than India’s three largest software firms, including Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd, put together—a fact which underlines why last year was bad for the poster boys of India’s $146 billion outsourcing sector.

Nasdaq-listed Cognizant, which ended the year 2014 with revenue of $10.26 billion, and will report $12.41 billion in revenues for 2015, after the company last week reaffirmed its full-year guidance, will have $2.15 billion in incremental revenues in the January-December 2015 period. This is higher than the $1.96 billion in new revenues brought by the three largest homegrown IT firms. Mumbai-based TCS added $1.18 billion in new revenue, while Infosys did $570 million in new business and country’s third largest software firm Wipro added $211.5 million last year. Cognizant, which has over 150,000 of its 220,000 employees based out of India, will declare its earnings next month.

Worryingly, some experts said that as more commoditized outsourcing deals have elements of digital technologies, including cloud computing and data analytics, this gap between Cognizant and homegrown IT firms will only deepen.

For now, Cognizant’s growth pace under its chief executive, Francisco D’Souza, should make the IT captains, including N. Chandrasekaran, Vishal Sikka and Abidali Z Neemuchwala, wake up to the threat posed by this young firm which was founded in 1994 as an IT services arm of Dun and Bradstreet Corp. and started operating as an independent firm only in 1996. TCS was founded in 1968, while Infosys was set up in 1981, the same year when Wipro too started selling computers.

Three key reasons, all of them linked, explain this development, according to experts. First, Cognizant’s buyout of TriZetto Corp. for $2.7 billion in 2014 largely contributed to this growth. Although both Infosys and Wipro spent close to $800 million in buying six companies last year—in addition to the two Bengaluru-based firms also spending over $50 million in picking up stakes in start-ups focused on disruptive technologies—most of these buyouts are of firms which hardly contribute much to the overall revenues.

“By my estimates, TriZetto commanded annual revenue of about $720 million, and Cognizant booked about $80 million in revenue from TriZetto in 2014 and an incremental $640 million in 2015. This means about $640 million of Cognizant’s revenue addition in calendar year 2015 is stemming from the TriZetto acquisition or inorganic revenue growth,” said Rod Bourgeois, founder of DeepDive Equity Research, a US-based equity researcher.

Even if we strip out $640 million from Cognizant’s revenue, the company had incremental revenue of $1.51 billion, which is still higher than TCS’s $1.18 billion new revenue.

This brings to the second point that Indian IT firms have grown at the slowest pace in more than six years even as Cognizant has continued to record good growth over the last few years. TCS is expected at-best to grow at 8% in fiscal year 2016. In calendar year 2015, TCS recorded 7.8% growth. Infosys posted 6.6% growth, while Wipro grew at 3%. This is compared to a 21% growth recorded by Cognizant. This slow growth by homegrown IT companies is on account of multiple reasons, with the primary reason being that Cognizant has been able to generate more business from clients in banking and finance space as Indian IT firms have struggled to scale up their business.

A case in point: For TCS, big banks and insurance firms now account for a little over 40% of the total revenue compared with 44% five years back.

“Banks are the largest technology spenders and so BFSI (banking, financial services and insurance) is the largest industry for all IT companies. Banks are again emerging as the largest buyers of new technologies as they look to transform their operations. Indian tech firms have lagged until now in garnering a big share of this new tech spend, and so growth is slowing,” said a Mumbai-based analyst at a domestic brokerage firm on the condition of anonymity.

Some of Indian IT firms’ largest clients, such as Cisco Systems Inc., have also cut their tech spending, thereby further denting growth.

This slow growth witnessed at domestic IT firms is primarily because more companies globally are looking at their IT vendors to help them transform their business. Technology vendors, which either have smart intelligent platforms that can process large data sets or which have a strong consulting practice to offer solutions that can potentially improve the way businesses are done by companies, are recording higher growth. This is the last theme, which explains why Cognizant is recording higher growth, as the company is considered to have invested in new-age technologies, including intellectual property led-platforms, ahead of homegrown IT firms.

“What we are seeing is the shift from human-based scale to digital-based scale,” said Ray Wang, founder of Constellation Research Inc., a technology research and advisory firm. Wang said that though Cognizant seems to be the leader for now, Indian IT firm’s push into more platform-led approach should help bridge the divide by the “end of 2016”.

To be sure, though Indian firms have also started investing in smart technology platforms over the last year, including Sikka’s focus on user-centric approach of Design Thinking, experts like Bourgeois of DeepDive Equity Research said that “India-based IT services market is facing multiple secular headwinds that will challenge the revenue growth of the top Indian services firms”.

“2016 is the year that will separate the service dinosaurs from the savvy cannibalizers, as revenue growth slides towards negative territory and the onus shifts from selling more buttocks on seats to maintaining sexy profit margins,” said Phil Fersht, CEO of US-based HfS Research, an outsourcing-research firm.