Cognizant's strategy of focus on sustainable growth pays off

BANGALORE: The company decided to focus more on sustainable business growth instead of chasing better margins than others. "Cognizant took an approach of working with and committing to a 19-20 % operating margin target, (before stock compensation expense) intending to reinvest the excess back into the business.

Unlike Infosys, it believes that a trade-off between margins and growth is present and will play out in the medium to long term," Edelweiss analysts Viju George, Kunal Sangoi and Pratik Gandhi said in a September report.

This approach is paying off. Cognizant reported revenues of $853.5 million during the September quarter, up 16% annually. The company saw a net headcount addition of 3,900 during the third quarter, taking the total headcount to 68,000.

Cognizant outperformed the consensus estimate of 21 analysts who predicted an average revenue of $805.1 million for the third quarter as well as its own guidance of 3% sequential revenue growth at $800 million.

"Clients, who have come to rely on us to help them achieve operational efficiencies, are now increasingly approaching us to serve as a consultative business partner as their industries face comprehensive upheavals from the recession and secular shifts resulting from new technologies and other market forces," Mr D���Souza said.

When UBS, Switzerland���s biggest bank by assets, wanted to sell its India back office and bundle the transaction with a multi-year outsourcing contract, TCS, Wipro and Infosys along with Cognizant bid aggressively. Eventually, Cognizant won the deal because of its long association with the decision-makers at UBS.

"Valuation was never too much of a concern for anybody. What really swung the deal for Cognizant was their relationship with UBS and the comfort they had," said a senior official at one of the tech firms that lost out.

In a period when new business was tough to come by, Cognizant acquired UBS��� India captive for around $75 million along with a five-year outsourcing contract worth up to $442 million. For Cognizant, sharp focus on the financial services vertical has been fetching rich dividends, especially compared to TCS, Infosys and Wipro.

On a run-rate basis in a difficult environment, Cognizant is adding more revenue per quarter from banking, financial services and insurance (BFSI) clients than its larger rivals. Between October 2008 and June 2009, Cognizant cumulatively added $56 million in revenues in BFSI compared to the preceding three quarters. During this period, revenue from BFSI for Infosys and TCS fell by $88 m and $43 m, respectively.