Cognizant fallout: Is the heavy selling in Infosys, TCS justified?

IT stocks extended their losing streak for a third straight day on Thursday. The BSE IT index slumped over 1.5 per cent underperforming the broader Sensex that traded 0.7 per cent lower. Shares in Infosys and HCL Tech traded with over 2 per cent cut while TCS shares were down nearly 2 per cent at 11.10 a.m.  

Analysts attributed the following reasons for the sharp selling pressure in IT stocks.

1) Cognizant's expected guidance may be weak: Cognizant, in a filing to the SEC (Securities and Exchange Commission) on Tuesday, said its top executives will receive 100 percent of their performance-linked shares if the company achieves revenue of $8.5 billion next year, a 16 percent rise over its projected 2012 revenue. The rise would be lower than the 20 percent growth, equivalent to revenue of $7.34 billion, projected by the company in 2012.

2) Muted growth for Indian IT firms: Dealers said Cognizant's earnings outlook is a bellwether for the earnings of other Indian IT firms. Bhavin Shah of Equirus told NDTV that Indian IT lobby Nasscom may project 10-11 per cent sales growth in fiscal year 2014, lower than 11-14 per cent growth for the current fiscal based on Cognizant's filing with SEC.

3) Infosys may continue to underperform: Global brokerage Macquarie retained its cautious view on Infosys after a meeting with Chandrashekar Kakal, global head of business IT services, Infosys. Infosys is unlikely to change its 5 per cent growth target, Macquarie said. US geography is showing some signs of recovery but Infosys remains very cautious on the outlook for Europe. The financial services vertical continues to be weak and discretionary spending remains constrained.

Many brokerages, however, said there was little or no reason for the selloff.

1) Financial services major Cowen expects 2013 offshore bill rate rising 3.2 per cent. 2013 could be a “catch-up” spending year and IT budgets are expected to grow 2-3 times faster than 2012, it said, adding that secular growth trends are intact.

2) In a note global investment bank JPMorgan said Cognizant's SEC filing is conservative. "This is not Cognizant’s annual revenue growth guidance... typically the initial revenue growth guidance for the last three years has at least been equal to or higher than the threshold for 100 per cent stock unit awards for management," JPMorgan said. (Read: Why Cognizant's SEC filing should not worry IT investors)

3) JPMorgan added that the IT industry demand is likely stable and not falling off by any means. The usual suspects such as Cognizant, TCS, Accenture and HCLT (selectively in infra-management) are likely continuing to win market-share as has been the case, the investment bank said in a note.