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Indian IT Industry Grows Faster Than Others, Yet Offers Downbeat Outlook

 May 08, 2012 10:20 AM
 


(By R. Chandrasekaran) India-based IT service providers grew faster in 2011 than the global industry pace. Yet, Cognizant Technology Solutions (Nasdaq: CTSH), the significant gainer with 33.3 percent growth outpacing all others in 2011, offered a downbeat forecast blaming the slowdown in demand. The company followed another technology bellwether Infosys (Nasdaq: INFY) in providing cautious outlook.

Yesterday, Cognizant had reduced its full year 2012 revenue growth forecast to a minimum of 20 percent from earlier projection of 23 percent, while Infosys guided fiscal year 2013 revenue to grow to 8 – 10 percent. Both companies revenue growth outlooks fell short of analysts' predictions.

[Related -Cognizant Technology Solutions Corp (CTSH): How Penetration Rates Are Faring?]

This is somewhat surprising to investors. In 2011, global IT spending witnessed 7.7 percent upside, but the top five IT companies from India recorded a growth rate of 23.8 percent, data from Gartner indicated. Significantly, five IT companies put together increased market share in the Western Europe to 2.8 percent from 2.3 percent in the previous year.

Similarly, their overall market share in the global IT service grew to 3.5 percent in 2011 from 3.1 percent in 2010. This is due to chipping away share from big multinational IT service provider.

While Cognizant's market share rose to 0.7 percent from 0.6 percent, Infosys share remained at 0.7 percent. In terms of revenue growth, Cognizant achieved the fastest rate among the top five companies with 33.3 percent upside, whereas Infosys settled with 17.8 percent growth, yet above the global industry average but below Indian industry average.

[Related -Cognizant Technology Solutions Corp (CTSH): How Q3 Earnings Will Fare?]

Infosys also guided fiscal year 2013 below the projected Indian industry average. While analysts were not surprised greatly by Infosys guidance since the company was focusing on high margin products, Cognizant reducing guidance surprised many.

Cognizant's comments confirmed what Infosys had indicated earlier. There has been a slowdown in discretionary spending and decisions are deferred making projections a somewhat tough proposition. Importantly, Wipro (Nasdaq: WIT) also provided downbeat outlook. The company's revenue grew only 12.3 percent.

This means that three India-based IT companies have provided cautious outlooks. Interestingly, research firm Gartner had earlier indicated that currency will impact IT spending. Currently, IT spending is estimated to grow 2.5 percent to $3.75 trillion in 2012 globally from the earlier expectation of 3.7 percent growth to $3.8 trillion.

In 2011, worldwide spending towards IT reached $3.66 trillion, according to Gartner data. Previously, the research organization predicted IT spending would grow 4.6 percent from 2011's level. The research organization cut its forecast in early January after Euro Zone economic uncertainty and to give effect to Thailand floods.

Given the advantage that the Indian IT companies enjoyed among the global IT service providers, Infosys, Cognizant and Wipro are likely to continue to beat global industry trend, but it could be Cognizant that will stand out among the three. The Indian IT companies market share growth adds to this view.

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