Cognizant’s acquisition playbook: What it means for Indian IT firms

Traditionally, ER&D services are largely provided by domain specialists. However, with spending gathering pace in the space over the last two years, IT firms are increasingly tapping into this new growth area.

US-headquartered Cognizant Technology Solutions’ latest quarterly results suggest a turnaround for Indian IT services firms, with analysts seeing signs of recovery after a tough 18 months of subdued demand.

Despite posting a marginal organic revenue decline of 0.1 percent in CY24, Cognizant’s acquisitions played a key role in driving a 6.7 percent year-on-year (YoY) revenue growth to $5.1 billion in the fourth quarter, beating analyst estimates.

It was Cognizant’s Engineering, Research, and Development (ER&D) acquisitions—Belcan and Thirdera—operating in the aerospace and defence verticals that contributed approximately 450 basis points of YoY growth to its Q4 revenue.

Phil Fersht, CEO of HFS Research, believes Cognizant’s results are encouraging for Indian IT firms and a shift from traditional outsourcing to AI-driven partnerships.

“They not only signify the loosening of the purse strings from enterprises in key areas of IT infrastructure and AI (Artificial Intelligence) development but also an acknowledgment that several of the leading Indian heritage firms are retaining the confidence of CIOs (chief investment officers) and other enterprise leaders,” Fersht told Moneycontrol.

However, challenges persist as the automotive sector’s decline has significantly impacted ER&D companies in recent quarters, driven by poor financial results, high costs of transitioning to electric vehicles, and economic downturns.

Also, the completion and non-renewal of long-term projects, which typically span 4-5 years, across companies suggest that net quarterly revenue decline is here to stay.

Cognizant’s Q4 results suggest a cautiously optimistic outlook for Indian IT services, with signs of recovery in discretionary spending and growth opportunities in ER&D services, mirroring trends in the broader industry.

Despite ER&D’s growth remaining below double digits, it still outpaces most traditional outsourcing companies.

Analysts believe this inorganic strategy highlights a broader industry trend where IT firms might leverage the merger and acquisition (M&A) route to counter sluggish organic expansion.

So far, Infosys has acquired two companies to strengthen its offerings in ER&D services by 2024 while HCLTech bought an automotive engineering services provider in 2023. HCLTech will establish a dedicated ER&D services centre to serve Olympus Corp.

Traditionally, ER&D services are largely provided by domain specialists such as L&T Technology Services, Cyient, Tata Elxsi, and others. However, with ER&D spends gathering pace over the last two years, IT services companies are increasingly looking to tap into this new growth area.

“Long term, as AI use cases evolve to physical AI, multiple use cases will emerge in the asset-heavy industries that are a major buyer of E&RD services,” Gaurav Parab, a principal research analyst at consulting firm NelsonHall told Moneycontrol.

Belcan: Strategic importance

Cognizant’s Belcan acquisition is in line with the trend of Indian IT firms expanding in high-barrier sectors like aerospace and defence, where competition is lower.

Fersht believes that Belcan’s technical engineering power strengthens Cognizant’s digital engineering capabilities, AI, automation, and analytics.

“With formidable AI, automation, and analytics capabilities, Cognizant now stands tall across all high-growth, high-adoption technologies. The Belcan acquisition deepens Cognizant’s client relationships, creating major new market opportunities that were previously unattainable,” he added.

Cognizant’s 2025 guidance of 1-3.5 percent organic growth is positive, indicating an improvement in client sentiment, improving discretionary spending, and growing AI adoption.

“Belcan was scaled acquisition in engineering services and it should give growth to Cognizant in coming years, both in engineering and also in IT, as there would be opportunities for selling IT solutions to Belcan’s engineering customers and increasing share of customer wallet,” according to Pareekh Jain, Founder and CEO, EIIRTrend.

Is it all rosy?

However, analysts cautioned that full recovery remains distant, as Cognizant’s guidance for the next quarter is still 70 basis points (bps) lower than its historical average.

While Balachandra Mallya, Senior Analyst, Everest Group, appreciated that Cognizant has addressed the majority of company-specific issues, he said its growth is far from full recovery.

“Its (Cognizant’s) guidance for the next quarter is lower than the historical average growth rate by 70 bps, while the full-year guidance includes a 250 bps inorganic contribution, implying low single-digit organic YoY CC (constant currency) growth,” Mallya said.

He also pointed toward the company’s operating margin outlook for CY25, which is below the pre-pandemic levels despite the conclusion of cost-optimisation programs.

For Indian IT firms, Cognizant’s large deal success suggests that big deals remain available, even as smaller deals pick up pace, as suggested by management commentary in Q3.

Mallya believes that while CY25 is likely to see improved growth compared to CY24, the recovery will be uneven, with some segments performing better than others.

What’s in the future?

Fersht said that the ability to merge IT and operational technology (OT) will drive a new wave of business transformation, particularly in volatile global markets.

Notwithstanding, the Indian IT service providers will likely continue their push into E&RD services.