Why Cognizant's SEC filing should not worry IT investors

IT stocks fell in contrast to the broader markets on Wednesday. The selloff came after New Jersey based- Cognizant Tech, in a filing to the U.S. market regulator Securities and Exchange Commission (SEC) on Tuesday, said its top executives will receive 100 per cent of their performance-linked shares if the company achieves revenue of $8.5 billion next year, a 16 per cent rise over its projected 2012 revenue. That led analysts to say that Cognizant may issue lower revenue growth guidance for 2013.
Here's why you should not worry about Cognizant's move
  1. No reason for fear: In a note global investment bank JPMorgan said "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".
  2. SEC filing conservative: In 2012, Cognizant had to cut back its initial revenue growth guidance of 23 per cent to 20 per cent barely after a quarter into 2012. "We believe that this time around, there is likely to be an extra element of conservatism in 2013’s threshold of 16 per cent. Cognizant’s FY13 internal revenue growth target (for 100% performance unit grants) of 16 per cent implies CQGR (compounded quarterly growth rate) of ~3.8 per cent, which is almost the same as the revenue CQGR for FY12 (about 4 per cent)," JPMorgan said.
  3. Positive for Indian IT: JPMorgan says 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.
  4. 2013 could be a better year for the industry than 2012: JPMorgan further says that barring hard-to-estimate effects of certain events like the US fiscal cliff, 2013/FY14 will likely be a better year for the offshore IT industry than 2012/FY13.
  5. Quantum of optimism: Comeback of discretionary spending, legacy deals opening up in 2013, stability of client budgets could constitute the trigger points in 2013, JPMorgan said. "If the effect of these ingredients exceeds our expectations, then reasonably valued stocks of laggards (such as Infosys and Wipro) and select mid-caps could give meaningful upsides, it added.



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