While Infosys trades at 21.5 times estimated 2011-12 earnings, TCS commands a multiple of close to 22 times and is the most expensive IT stock, while Wipro trades under 19 times.
Shareholders optimism should not be misplaced. Earnings of top-tier IT services firms for the December 2010 quarter are likely to be fairly good despite there being fewer working days. More than the results, however, shareholders in these companies would look forward to some encouraging announcements especially on how IT firms are going to protect their margins at a time when getting employees at reasonable costs is a challenge. Indeed, the demand side of the story appears less of a concern, with an almost nothing can go wrong kind of environment and companies should confirm this.
Revenues are expected to grow between 4.5-7.5% sequentially, in dollar terms, with both Infosys and TCS likely to clock at least 7%. The top line would be driven primarily by volumes which could rise by about 6-7% quarter-on-quarter. Few companies are likely to see any meaningful increase in pricing. The good news is that favourable cross-currency movements and some available leverage in sales and administration costs should help offset the impact of an appreciation in the rupee, enabling companies to report reasonably robust margins. The rupee has appreciated by about 3.5% against the dollar during the quarter.
Upward revision in earnings is possible for 2011-12. Brokerages like Macquaries are projecting revenue increases of 25%, stable Ebitda and a profit growth of 20%. In view of the robust earnings growth outlook, we believe current valuations are not stretched, Macquarie stated. Of course, investors would want to know if customers are increasing spends. Moreover hiring plans would indicate how confident companies are of winning orders.Strong US corporate revenues and earnings, increasingly available low-cost capital, depreciated capital bases and low capex/sales ratios will likely lead to increased spends on IT, observes Macquarie Equities Research.