We expect a robust quarter, with 4-6% volume growth and flat pricing. However, the reported rise in dollar should be impacted by an adverse cross-currency fluctuation (pound sterling/euro weakness to dollar) by c1%. Our channel checks suggest accelerated growth in the sector, led by pent-up demand and an uptick in discretionary projects.

FY11 Infosys guidance/consensus estimates: While we believe guidance is likely to be revised upwards, helped by a stronger demand environment and favourable rupee (against Q410), we believe the revision is likely to remain lower than the already-raised consensus expectations. We expect 2-4% upward earnings revision in the consensus FY11/12 estimates.

Stocks: We continue to prefer Infosys and HCL in the top-tier Indian IT sector. We expect strong volume growth for both companies. However, HCL?s stronger volume growth is likely to be offset by margin pressure due to one-off costs in the quarter. At the current modest valuation, we remain Overweight (V?with volatility) on HCL and OW on Infosys. We expect a strong quarter for TCS [OW(V)], and remain N(V) on Wipro. In the mid-cap we prefer Polaris [OW(V)] due to high visibility and undemanding valuation and Persistent Systems [OW(V)] due to strong growth momentum.

Investment thesis: We remain positive on the long-term fundamentals of the sector and believe topline growth will remain robust for the next two-three years.

Valuations and risks:

HCL: We are Overweight (V) on HCL and our target price is Rs 455. We value HCL at a 25% discount to Infosys. Our one- year target price of Rs 455 represents a PE (price-to-earnings) of 15x on our FY12e EPS (earnings per share).

Risks: The rupee-dollar appreciation, disappointment on the growth of IT budgets in 2010, the ERP market remains weak longer than expected, SAP losing marketshare to Oracle, muted capex spend by global telecom players in 2010 and wage inflation higher than our estimates and corresponding pressure on margins.

Infosys: We are Overweight on Infosys. We value IT companies on a relative valuation basis, underpinned by a fundamental discounted cash flow analysis, and with reference to historical trading ranges and beta to the market. Our target price of Rs 3,200 represents a PE of 22x onFY12e EPS.

Risks: Upside surprise in volume growth as a result of pent-up demand for IT spending in 2010, wage inflation may be higher than expected and earnings accretive material acquisition.

TCS: We are Overweight (V) on TCS. We have been highlighting that the valuation gap to Infosys will narrow as TCS?s operating performance improves, led by declining hedging losses and stronger topline growth. In line with our expectations, the stock has narrowed its valuation gap to Infosys over the last nine months. TCS is trading at a modest 9% discount to Infosys on our FY11e EPS.

Risks: TCS has a strong pipeline. We expect project ramp-up to accelerate from H2CY10. Any further delay is a risk to our earnings forecast, wage inflation can be higher than our estimates, putting pressure on margins, muted capex spend by telecom players in 2010, rupee-dollar appreciation and disappointment on the growth of IT budgets.

Wipro: We are Neutral (V) on Wipro and our target price is Rs 450. We forecast a FY10e-12e EPS CAGR (compound annual growth rate) of 10% for Wipro against 15% for Infosys and, therefore, expect Wipro shares to trade at a one-year forward multiple of 20x, which is a 10% discount to our Infosys target valuation.

Upside risks: Margins may not fall as cost-cutting and growth in non-linear initiatives absorb wage pressure; topline growth could surprise, as discretionary spending accelerates further. The downside risks are macroeconomic and currency volatility.