Cognizant soars, Wipro, Infy muted in US market

BANGALORE: Over the last year, IT major Cognizant's stocks have outperformed the American depositary receipts (ADR) of top tier Indian peers Infosys and Wipro on the US markets by a big margin.
Between March 5, 2010, and March 4, 2011, Cognizant stocks on Nasdaq rose 55% to $76.32. Wipro's on the NYSE remained flat at around $13.45 and Infosys's on Nasdaq increased 17.5% to $67.67 during this period. Over the last three months, Cognizant stocks rose 9.5%, while Wipro and Infosys stocks fell 7% and 2.6% respectively.
"Growth is heavily rewarded in the US markets. That has helped Cognizant's stronger upward rally," said Ankur Rudra, IT sector analyst at Ambit Capital.
In the previous quarter, Cognizant's revenues grew 45% year-on-year to $1.31 billion. Correspondingly, Infosys grew 28.7% to $1.56 billion and Wipro grew 19% to $1.34 billion.
Cognizant narrowed the revenue gap with Wipro's IT services business to just $30 million last quarter from over $347 million in the Oct-Dec quarter of 2008. The company also inched up towards the Infosys' sales figures; Cognizant trailed Infy by $275 million in the previous quarter as compared to $418 million in the Oct-Dec quarter of 2008.
Cognizant's high growth is attributed to keeping operating margins at around 18-19%, lower than many of its Indian top-tier rivals. A significant amount of its earnings are reinvested into the business in the form of employee development, and sales and marketing.
Hari Rajagopalachari, executive director-consulting at PWC, said that Cognizant also shows greater income predictability. "Cognizant has consistently exceeded market expectations and is a low risk stock from an investor's perspective," he said.
On the other hand, Wipro's change in CEO created some worries over the company's future and added to the negative momentum on the stock initiated by the weaker earnings in recent quarters.
Though Infosys has been growing at a healthy rate, concerns about margin erosion, uncertainty about the management changes and the flattish guidance for the fourth quarter has limited the upside potential of the stock.
Some analysts say that as Cognizant is US headquartered and has a relatively greater proportion of employees based in the US, it gets the advantage of familiarity and favourable investor perception. This is seen to enable the company to win more deals in the US. The average trading volumes for Cognizant are also higher.
According to Ashish Chopra, analyst at Motilal Oswal, the investor interest in the Cognizant stock is also reflected in its higher price earnings (P/E) ratio. A higher P/E ratio means that investors are willing to pay more for each unit of net income. Cognizant was trading at a P/E ratio of 32.2 compared to Wipro's 28.74 at close of trade on March 4.