Cognizant Shares Bounce Back

The stock steadies after a selloff spurred by the weak dollar.
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SAN FRANCISCO -- Shares of the Indian tech services firm

Cognizant

(CTSH) - Get Report

rebounded Friday from a dollar-inspired selloff a day earlier.

Investors shook off concerns that the company is helpless to counter the appreciation of India's currency, the rupee, which can eat into Cognizant's profit margins. The company's shares were recently up $2.56, about 3.5%, to $75.97.

Investors may also be taking advantage of the opportunity to scoop up Cognizant's shares at a low price. Among the large Indian tech service providers, Cognizant is the most attractively priced given its earnings potential, and it is also better able to manage the pressure of the rupee's rise, says Ashish Thadhani of Gilford Securities.

Gilford has not performed investment banking work for Infosys in the past 12 months, and Thadhani does not own the company's shares.

Contrasting Cognizant's gain, shares of its larger rival

Infosys

(INFY) - Get Report

were recently trading down 20 cents to $46.82.

The stocks of both Cognizant and Infosys dived on Thursday as lower U.S. interest rates pushed the rupee to a nine-year high. Both companies have seen their shares fall more than 20% from their 52-week highs as currency effects and wage inflation in India have spooked investors.

The fact that Infosys is not getting the bounce-back that Cognizant's shares are enjoying suggests that investors are taking note of differences in the way the companies can manage current headwinds.

Analysts estimate that every 1% rise in the rupee vs. the dollar dents Cognizant's operating margin by 0.2 percentage points. That's the lowest among its peers, says Gilford's Ashish. Infosys, for example, takes a 0.5-percentage-point hit to its operating margins with each 1% gain the rupee makes against the dollar.

Wipro

(WIT) - Get Report

and

Satyam

(SAY)

fall between the two.

Cognizant's shares are also the most attractively valued among the large Indian outsourcers. Thadhani estimates that its shares are trading at a 22% discount to its projected earnings-per-share growth over the 2006 to 2008 timeframe. This compares with a discount of 20% for Satyam, 18% for Infosys and only 4% for Wipro.

"Among the offshore outsourcing bellwethers, Cognizant is the least exposed to currency swings, and it is on track to post industry leading EPS growth," says Thadhani.

Earlier in the week, the company said it intends to spend $100 million buying back its stock over the next 12 months. The move is largely symbolic for a company with a roughly $11 billion market value, but it signals management's belief that shares are undervalued.