The December quarter earnings of IT giants Infosys and TCS seem to have raised investors? expectations from the sector. After Infosys beat street expectations and TCS sustained its growth trajectory through their respective third-quarter numbers, the sectoral index on NSE has rallied close to 12% as against less than 1% gains made by the benchmarks.
Even as the latest stock performance of other IT players, along with positive comments from the management of the IT bellwethers, have raised hopes of a turnaround after two years of underperformance. Experts regard several quarters of strong earnings across the space essential for the same.
As per Kotak Institutional Equities, Infosys?s performance and guidance does not reflect an increase in the discretionary spending by companies but a result of the company?s flexibility on pricing and deal structures. The brokerage house believes that a deal win for Infosys means a deal loss for another vendor who may not get his share of business. ?This spiral can continue unless discretionary spending shows noticeable uptick to support growth aspirations of an enhanced list of tier-I IT players,? it added in a note.
In its latest quarterly results, Infosys beat street expectations by posting a 4.2% sequential growth in its organic dollar revenue growth and maintained its FY13 guidance for the same at 5% y-o-y growth. While it added 53 clients in the period, including 8 large deals amounting $731 million, its management expressed confidence on ?a strong pipeline of large deals?. Even TCS management indicated of a robust deal pipeline and a better demand trends for the sector in 2013. The biggest IT player largely met market expectations with 3.3% q-o-q revenue growth and healthy rise of 50 basis points in its operating margins.
Following such strong set of numbers, IT stocks demonstrated strong rally with Infosys leading the gain through 19% rise since last Friday. While TCS gained 7% since then, Mindtree, CMC, HCL Tech, Wipro and Polaris have each outdone largecap indices with 4% to 12% advances in the period. The top two IT players also received at least nine revision in earnings expectations and four to six rating upgrades in the last three trading sessions.
According to HSBC, street expectations for sector growth are already moderated compared to early 2012. It acknowledges that US software and IT investment contributions to corporate earnings and GDP are at all-time low, clearly indicating that corporates are under invested in IT.
