Cognizant revises guidance upward to 10%: But can it manage growth?

Nasdaq listed IT services major Cognizant revised its financial year guidance from 9 per cent to 10 per cent in constant currency basis. It had guided for a growth of 5.5 per cent to 7.5 per cent for CY21 in Q1.

For the second quarter, ended June 30 (company follows Jan-Dec calendar) it reported revenue growth of 12 per cent in constant currency, surpassing its guidance. It had guided for a growth of 8.9 per cent to 9 per cent in Q2 CY21. The company reported

“We delivered a strong second quarter,” said Brian Humphries, CEO. “Through targeted investments, we’ve been shifting our portfolio to faster-growing market segments while extending our capabilities and partnerships to help clients build modern businesses. I see a stronger, more competitive Cognizant emerging, with growing commercial momentum. We are bullish on the industry and our prospects within it.”

Though the numbers exceed the guidance that the company had announced, the question that many are asking is can Cognizant manage growth with industry high attrition numbers?

For Q2, the company said that its voluntary attrition touched 29 per cent on an annualised basis and 18 per cent on trailing 12 months basis (LTM). The company stated in its analyst call that it is ramping up its hiring and skilling mechanism. Humphries, during the call, shared that Cognizant now expects to hire approximately 100,000 laterals in 2021 and to train close to 100,000 associates. “In addition, we expect to onboard approximately 30,000 new graduates in 2021 and make 45,000 offers to new graduates in India for 2022 onboarding,” he said.

The company also stated that it is taking all measures to reduce attrition, including compensation adjustments, job rotations, reskilling and promotions and a host of associated engagement activities. “Fortunately, we meaningfully increased our recruiting capacity over the last 6 months as we anticipated the spike in attrition, following the V-shaped demand recovery in the second half of 2020,” said Humphries on the call.

Despite all these measures, the impact of supply side constraints was evident even on Q2 numbers. “Regrettably, we just — despite growing 15 per cent in the quarter, we’re yet unable to meet the full expectations of our own potential and what is out there in the market. So we’re working through that as best we can and doing our best, as I said, to minimize attrition, whilst at the same time to maximize employee engagement and to maximize onboarding,” said Humphries.

Attrition has been going up for the industry as a whole, and every company is making sure they retain talent and hire freshers from campuses to augment demand. The question that arises in case of Cognizant is from where is it going to get 100,000 lateral hires in CY21 to join the company. Two, fresher hiring has its own challenges, as they need to be trained which takes anywhere between 3.5 to 4 months.

In a recent interview to Business Standard, V V Apparao, CHRO HCL Technologies explained the current supply side well. “Every company is sitting on deals that are three times what they see. Besides the war of talent in for the people in the range of three-four of experience, again that pool of people is finite. The only segment the numbers are finite is in the 0-3 years’ experience. So everyone is ramping up recruitment from campus hiring,” said Apparao. He further added: “Our retention measures are more focused towards the top talent. And there the attrition is in single digit.”

Assuming every company will try and do its best to retain top talent how will Cognizant meet its target. Hiring sub-contractors can be a measure but that will impact margins. “In addition, we anticipate continued cost pressure from our elevated attrition, which includes higher recruiting costs, lateral higher wages and subcontractor costs,” said Jan Siegmund, CFO, Cognizant.