Export-driven software services companies are set to report robust growth in quarterly earnings and a firm outlook, driven by an expected increase in clients' technology budgets.
Leading Indian outsourcers who maintain technology operations for clients such as General Electric and Citigroup have been on a hiring spree and have given pay hikes of up to 20 percent to ward off poaching by global rivals.
Tata Consultancy Services, Infosys Technologies and Wipro, the top three outsourcers, get more than 90 percent of their revenue from overseas.
The outlook for the IT firms, especially the larger ones, looks positive in the short term. Volumes are growing. The U.S. economy is shaping up better than expected, said Mahesh Patil, head of equities, domestic assets, at Birla Sun Life Asset Management.
Indian outsourcers derive more than half their revenue from the United States, with Europe contributing more than a fifth.
Global spending on technology is likely to rise 5.1 percent to $3.6 trillion in 2011, research firm Gartner said last week, higher than its previous estimate as the dollar's recent weakness helped to push IT spending beyond its forecast for 2010.
Given the fact that companies had not invested in technology in the past two years, they will now have to spend to improve competitiveness. So, we would see much better demand, Patil said.
Infosys, a trend-setter for India's $60 billion outsourcing sector, kicks off the earnings season on Thursday, with analysts expecting India's No.2 software exporter, to raise its fiscal 2010/11 dollar revenue growth outlook to 27-28 percent from 24-25 percent projected in October.
There is all reason to expect good results as the general momentum of business has been good and the rupee has not strengthened as much as was expected, said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services.
Last month, Accenture reported higher-than-expected quarterly revenue and earnings, and raised its full-year outlook as more customers sought its help to run their businesses more efficiently.
For Infosys and bigger rival Tata Consultancy, surging wages and intensifying competition from global firms such as IBM, Accenture and Hewlett-Packward are key risks, besides a possibility of sharper appreciation in the rupee.
Consolidation is also picking up. On Monday, mid-sized software firm iGate sealed a deal to buy a majority stake in India's Patni Computer Systems for $1.2 billion, helping it to take on bigger rivals.
An appreciating currency is also a risk for the sector.
The rupee firmed 0.6 percent against the dollar in October-December, taking the rise in 2010 to 4.1 percent.
The longer term risk of the rupee strengthening still remains. Next year's outlook will be a little marred by the rupee. Attrition is another risk, Rawal said.
MARGINS UNDER PRESSURE
Even as earnings rise, analysts expect profit margins to largely come under pressure, partly due to higher wage costs.
Religare Institutional Research said Infosys was likely to report a 70 basis points drop in October-December operating profit margins from July-September, while Tata Consultancy was likely to see a 100-basis point dip.
Margins at Wipro, which had disappointed in the September quarter with a 9.7 percent rise in profit, are expected to climb 70 basis points due to limited foreign exchange losses, the brokerage said in a note.
Shares in Infosys, valued at about $43 billion, rose 13.3 percent in the December quarter and Tata Consultancy jumped 26.3 percent, versus a near 15 percent rise in the sector index and the main index's 2.2 percent gain.