- Infosys has managed to cut the revenue difference with Cognizant by half in the last two years
- The likely change in the pecking order is the result of the transformation taken at Infosys
Infosys Ltd could topple Cognizant Technology Solutions Corp. by the end of March 2023, if it maintains its current growth trajectory, to become the second-largest Indian information technology services company, marking an inflection moment in the once-moribund sector.
The Bengaluru-based company has managed to cut the revenue difference with the New Jersey-headquartered firm by half in the last two years.
This change in the pecking order underscores the transformation at Infosys undertaken by chairman Nandan Nilekani and chief executive Salil Parekh. It also underlines the growth pangs faced by Cognizant, which is struggling to build a stable leadership team and deliver consistent growth under chief executive Brian Humphries.
Infosys ended with $4.25 billion in revenue in the October-December period, reporting an industry-leading 6.3% sequential dollar revenue growth. Cognizant, which follows a January to December financial year, expects revenue to be between $4.75 billion and $4.79 billion, translating to a $500 million difference in quarterly revenue between the two companies.
This may appear to be big. However, the faster growth by Infosys over the last two years has prompted some analysts and industry executives to point to a change in the pecking order around the corner.
At the end of December 2019, Cognizant ended with $4.28 billion in revenue as against $3.24 billion of Infosys, a gulf of more than $1 billion.
However, just 12 months later, at the end of December 2020, Cognizant’s lead shrank to $688 million, as it did $4.18 billion in business against $3.51 billion by Infosys.
Now, that gap has narrowed to $500 million.
Cognizant has outlined an 8-11% growth for 2022. An 8% growth will translate to Cognizant doing $5.13 billion in business in October-December 2022 while an 11% growth takes that to $5.27 billion, according to Mint’s estimates.
Infosys, which reported a 21% revenue year-on-year growth in the latest quarter, declined to give guidance for the current calendar year. However, the management on Thursday affirmed this growth momentum will continue in the current calendar year.
“The colour for this calendar year is that the demand environment remains strong,” Parekh told analysts when asked if the company could repeat its strong performance. “Our overall pipeline (of contracts) is the largest we have had in a very long time. The number of large deals that we closed is strong (Infosys won 25 deals, each of which was more than $50 million in value). This gives us good confidence,” he said.
If Infosys repeats a 21% growth in the December quarter, it will translate to $5.14 billion in revenue and help it surpass Cognizant at the lower end of the guidance.
“The growth momentum at Infosys and Cognizant’s struggles suggest that it’s only a question of if Infosys will overtake Cognizant in the December or March quarter,” said a Mumbai-based analyst at a foreign brokerage.
Hearteningly for investors of Infosys, the company has managed a faster growth at higher profitability: Infosys’ operating margin was 23.5% in the December quarter, more than 800 basis points more than Cognizant’s 15.4% during the July-September period. Infosys’ market capitalization totalled $108 billion against Cognizant’s $46.3 billion as of 12 January.
Cognizant raced past Infosys to become the second-largest IT company, behind Tata Consultancy Services Ltd, in the April-June period of 2012 when Cognizant ended with $1.79 billion in revenue against $1.75 billion in revenue reported by Infosys.
A decade later, it appears that tables are turning.
“This outsized growth (at Infosys) demonstrates a variety of things. First, it reinforces confidence among customers that a company is attracting the right talent and delivering superior solutions. Second, it reaffirms confidence among employees as superior growth implies faster career progressions. Finally, it’s a marker to investors and industry analysts and is a guidepost to future share price,” said a senior IT industry executive.
Strong demand for solutions offered by IT firms over the last year implies that estimating full-year growth for a fast-growing IT services company is not tedious. A case in point is Wipro. Mint reported on 2 August that Wipro was poised to grow the fastest among the five largest IT companies with full-year revenue expected to grow 23.1%.
On Thursday, Wipro said it expects its full-year revenue to grow between 27 and 27.5% in the year ended March 2022.
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