Margin expansion through cutting costs: Indian IT cos going the Cognizant way

We view these results as positive. The Wall Street was calmed by Cognizant’s CEO Ravi Kumar’s outlook despite tepid revenue growth, with EPS and the stock price going up. Besides, Cognizant has won significant contracts in industries and regions beyond its traditional strongholds, positioning itself well for future growth - Ashish Chaturvedi, Practice Leader, HFS Research, tells Bizz Buzz

Bengaluru: Cognizant’s cost cutting moves in the form of plans to reduce 3,500 jobs and rationalisation of real estate assets show the growing cost pressure in the IT industry. Sources in the know said that many Indian IT firms are likely to follow suit, albeit silently without publicising these moves.

“What Cognizant is doing now, most Indian companies will do the same in coming quarters. But those cost cutting moves will be executed silently,” said an industry source.

Announcing its first quarter results, Cognizant has embarked upon a $400 million cost savings plan. This will be achieved by reducing 3,500 non-billable roles, which is about one per cent of its global workforce. Moreover, Nasdaq-listed firm eyes to consolidate its real estate assets globally, involving 80,000 seats.

“This shift will provide an opportunity to rationalize the workspaces across the world and especially in India’s largest cities where we are distributing some real estate to smaller cities where we can expand and by modernizing some existing space. We expect the structural shift in our real estate costs to help eliminate 80,000 seats and 11 million square feet in large cities in India,” Ravi Kumar S, CEO of Cognizant, said during the earnings call with analysts.

“We expect this program to help enable us deliver margin expansion in the range of 20 to 40 basis points in 2024, while supporting a large deal pipeline,” he added. One percentage comprises 100 basis points.

Industry experts are of the opinion that Cognizant’s Q1 earnings and management commentary have reposed faith on the new CEO’s ability to turn around the company, which has been lagging its peers during the pandemic years.

“We view these results as positive. The Wall Street was calmed by Ravi Kumar’s outlook despite tepid revenue growth, with EPS and the stock price going up. Besides, Cognizant has won significant contracts in industries and regions beyond its traditional strongholds, positioning itself well for future growth,” Ashish Chaturvedi, Practice Leader, HFS Research, told Bizz Buzz.

Cognizant’s revenue grew 1.5 per cent in constant currency term to $4.8 billion in the first quarter of 2023. For the whole financial year, the company has guided for a revenue growth in the range of -1 per cent to 1 per cent in constant currency term.

“We do not anticipate a really material contribution of the large deals that we signed until the third and fourth quarter of this year. So, we do anticipate revenue growth acceleration throughout the fiscal year throughout the quarters,” Jan Siegmund, Chief Financial Officer, Cognizant, said.