Infosys Set To Pip Cognizant To Become 2nd-largest IT Services Firm

Infosys, which posted $4.66 billion in revenue in the October-December period, expects to grow between 16% and 16.5% in constant currency terms in the year ended March 2023.

Bengaluru-based Infosys does not give quarterly guidance and only forecasts full-year revenue growth in constant currency terms.

A constant currency term does not take into account the exchange rate fluctuations.

A Bloomberg poll of 18 analysts expects Infosys to report $4.78 billion in revenue in the quarter ended March 2023, which will be more than Cognizant’s upper-end of $4.76 billion in revenue in the same period. Mint reported in January last year that Infosys could pip Cognizant before March 2023, almost a decade after 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 change in the pecking order underscores the transformation at Infosys undertaken by chairman Nandan Nilekani and chief executive Salil Parekh. It is in contrast with the challenges faced by Cognizant, which lagged its peers under former boss Humphries.

Hearteningly for investors of Infosys, the company has managed faster growth at higher profitability: Infosys’ operating margin was 21.5% in the December quarter, 730 basis points more than Cognizant’s 14.2%.

Faster growth and higher profitability underscore why investors value Infosys more than Cognizant: Infosys’ market capitalization totaled $81 billion against Cognizant’s $36.3 billion as of 2 February.

For now, at least one analyst expects Cognizant under Ravi Kumar will take time to rebuild itself.

“We think FY23 represents the start of a long journey for Cognizant to reposition its business for improved growth," Keith Bachman, an analyst with BMO Capital Markets, wrote in a note, titled, “New, Long Journey", dated 3 February, after the company declared its earnings

“New leadership wants to make CTSH more competitive in larger deals as well as better manage headcount. Near term, we believe CTSH faces both growth and margin headwinds, and will continue to underperform peers over the next twelve months," said Bachman.

Mint earlier reported that Cognizant under new boss Ravi Kumar, a former Infosys executive, wants to prioritize winning large deals to drive revenue growth, boost morale, and improve investor sentiment, without getting distracted by leadership changes.

On Friday, New Jersey-headquartered Cognizant said revenue in the October-December period totaled $4.84 billion, a 0.4% sequential decline from the $4.86 billion in the July-September period.

Cognizant which follows January-December financial year has done away with its practice of giving full-year revenue guidance. Cognizant grew 5% to end with $19.43 billion in revenue in 2022.

Cognizant’s operating margin slipped 220 basis points from 16.4% at the end of the September quarter to 14.2% in the fourth quarter, primarily because of one-off impairment charges related to one healthcare client.

Cognizant had to incur higher capital prices for servicing a contract from New York-headquartered EmblemHealth, Mint reported in its edition dated 20 January when it detailed the reasons why the company sacked Humphries.

Bachman expects Infosys to report $4.75 billion in revenue as against $4.72 billion in revenue by Cognizant in the January-March period, also pointed out that Cognizant is re-evaluating its strategy to win more business from its clients in the financial services, which accounted for about a third of total business last year.

“Our expectation is that growth is weak for all of CY23, including a continued decline in Financial Services, where CTSH is actively reevaluating its strategy. Our initial expectation is for flattish to modest growth, in CC, for the full-year, though with notable uncertainty," said Bachman in his note.

Significantly, Cognizant expecting a sequential decline in business implies that it will be the third straight quarter of revenue decline after it first saw its revenue dip in the July-September period.