Should analysts worry about Cognizant's prospects in 2013?

Cognizant created a flutter on Wednesday (December 5). It stated that senior executives would receive their performance-linked stock units in full only if the IT services company achieved its revenue target of $8.52 billion in 2013.  

The revenue number implies growth of 16 per cent over the projected top-line of 2012, and is lower than the 20 per cent yearly growth the company had projected this year.

So, should analysts, investors and the IT industry be concerned about Cognizant's prospects in 2013? Or is some kind of a trouble brewing in the company, which has been growing at a scorching pace over the last few years?  

The Nasdaq stock exchange's reaction to the news may provide some indication. On December 5, Cognizant's stock ended 3.71 per cent higher, at $69.63. The reason it did not take a beating is perhaps because market watchers have realised that the company's statement was not a guidance on revenue. It was simply a lowering of the criteria for executive earnings.  

Second, even if Cognizant were to clock growth of 16 per cent in 2013, that would be more or less be in line with analyst expectations. On average, analysts expect the company to grow 16.7 per cent in 2013 to $8.58 billion. The slower growth projections for 2013 are a function of both Cognizant's large base as well as the economic situation in the US.  

Sudin Apte, CEO of outsourcing advisory Offshore Insights, pegs the IT industry's growth in 2013/14 at 13-15 per cent. So, Cognizant's 16 per cent would be above industry growth.  

While too much should not be read into the company's statement, it may make sense to take note of some of the buzz around Cognizant. Some analysts feel that the company, much like rival Infosys, is getting conservative. Initially, Cognizant had projected growth of 23 per cent in 2012, then pared it to 20 per cent. Given the economic uncertainties, it is likely to be circumspect in its guidance, going forward.  

Apte has also been vocal about the risk of Cognizant spreading itself too thin. "The next 18 months will be critical. Over the last two years, they have entered many new markets and geographies. They will need to manage this growth," he says.  

Cognizant will announce its fourth quarter and year-end results in February 2013. The guidance it provides then will indicate how well the company is managing itself.

Indeed, it will also be a pointer to how well the IT industry is expected to perform next year.