Cognizant, Patni: India IT Firms to Watch

The two IT firms could witness ratings and earnings estimate revisions on the upside over the next few days.
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Cognizant Technology (CTSH) - Get Report and Patni Computer (PTI) - Get Report are two India technology stocks to watch; these stocks will likely witness ratings and earnings estimate revisions on the upside over the next few days.

The offshore demand environment has picked up during the March quarter on the back of a broad-based recovery in IT spending in the U.S. and Europe. Analysts expect the management of these two companies to provide a buoyant outlook for fiscal 2011 during their earnings releases over the next week or so. This could provide a fillip to stock prices.

Cognizant has 22 buy, no hold, and no sell ratings, as per

TheStreet's

Analyst ratings guide. Patni has three buy, three hold, and no sell ratings.

Wipro

(WIT) - Get Report

and

iGATE

(IGTE)

joined

Infosys

(INFY) - Get Report

in providing

an upbeat outlook for fiscal 2011

.

Strong recovery in the IT spending of banks and telecom companies helped Infosys sign new contracts during the first quarter. Increases in IT spending of insurance and pharmaceutical companies and recovery of retail and consumer product companies in the U.S. helped Wipro sign new deals with Main Street America Group and

Best Buy

(BBY) - Get Report

. iGATE, meanwhile, signed new contracts with North American- based banks and a Fortune 500 marketing agency.

Patni and Cognizant are currently trading at price-to-earnings ratios of 16 and 25, respectively, in comparison with Infosys' 24, Wipro's 31.5, and iGATE's 16.4.

Cognizant

Recovery of the IT sector in the quarter and lower exposure to currency headwinds could enable Cognizant to exceed its non-GAAP margin guidance of 19% to 20% and revenue guidance of $935 million for the quarter.

Analysts polled by

Bloomberg

estimate the company will report revenue of $940 million for the first quarter compared with revenue of $736 million and $889 million for the first quarter of 2009 and December quarter 2009, respectively.

Earnings before interest, taxes, depreciation and amortization is expected to reach $198 million for the March quarter, registering growth rates of 30.3% and 7.03% year over year and quarter over quarter, respectively.

The company is less sensitive to India-based costs relative to Infosys since Indian salaries represent less than 20% of the company's total revenue, compared with 25% of Infosys. Appreciation of INR by 1% is expected to impair Cognizant's operating margins only by 0.13%, compared with 0.4% for Infosys.

Cognizant has historically outperformed Infosys' growth by about 50 basis points during the June-quarter. Infosys guidance for fiscal 2011 implies a 3% to 4% growth in constant currency for the June-quarter. This suggests that Cognizant could also raise its second-quarter revenue guidance by an equivalent amount.

Patni

Patni has increased its participation in large deals during the first quarter ended in March, which are likely to provide stable cash flows in the upcoming years.

In addition, Patni is focusing on flattening the employee pyramid, increasing utilization rates, and lowering overhead costs to improve profit margins. Further, the company is targeting to increase the share of fixed-price projects to tide over currency headwinds.

The company has cash equivalents worth $440 million with a limited capital expenditure of $15 million to $20 million. This improves the liquidity profile of the company and provides opportunities to seek suitable acquisitions in tandem with management's focus on inorganic opportunities, especially in Europe.

The stock topped the Indian IT ADRs with a year-to-date gain of 26% compared to the gains of 21.8%, 18.2%, 17.6%, 12.1% and 4.7% registered by iGATE,

Satyam Computer

(SAY)

, Cognizant, Infosys, and Wipro, respectively.

Wipro, Infosys

Wipro last week announced its results for the fourth quarter and said it expects revenue from its IT Services business to be in the range of $1.19 billion to $1.215 billion.

Management guidance implies revenue growth of 2.1% to 4.2% quarter over quarter in comparison with Infosys cumulative quarterly growth rate of 3.8% to 4.2%.

For the quarter ended in March, revenue from Wipro's IT services grew by 3.5% quarter over quarter and 11.5% year over year. The company secured two $100 million deals during the March quarter, and for fiscal 2010 the total number of deals were five $100 million deals and 14 $50 million deals.

EBIT of IT services surprised analysts by growing at 20% in rupee terms year over year on the back of fixed price projects, overcoming the effects of wage hikes and a stronger rupee against the dollar. In comparison, gross margins and EBITDA margins of Infosys declined during the December-quarter.

The share of fixed price projects of Wipro increased to 44.3% during the quarter from 42.5% in the December-quarter in comparison with Infosys increase to 41.9% from 40.6% for the same period.

Looking ahead, fixed price contracts and productivity improvement targets will enable Wipro to maintain its margins despite the currency headwinds.

As per

TheStreet's

Analyst ratings guide, Wipro has four buy, five hold, and one sell ratings.