Shares of Infosys Technologies Ltd hit a new all-time high of Rs2,518 each on Monday. Its peers Tata Consultancy Services Ltd and Wipro Ltd aren’t far behind, trading close to record highs as well. Investors don’t seem to be worried about the fact that valuations are close to 22 times estimated earnings for fiscal 2010-11. The pet theme on the street is that consensus earnings estimates for FY11 and FY12 will continue to be upgraded in the next few quarters.
A recently released report by IDFC-SSKI states, “April 2009 marked the beginning of an earnings upgrade cycle and consensus estimates for tier 1 Indian IT (information technology) companies have been revised upwards by 5-15% for FY10 and 10-25% for FY11. We expect this cycle to extend beyond 2010 and last for 7-8 quarters with further earnings upgrades.” Quite a few analysts share this view.
Graphics: Yogesh Kumar / Mint
They are quick to point to the improving economic data in developed countries, and are particularly enthused by the data released last week in the US. Retail and auto sales are much better, while unemployment numbers have also improved, leading to a view that a recovery is well on the way. All this is expected to result in a revival in IT spending. In 2009, global spend on IT is estimated to decline by 6-8%, despite which Indian IT firms did reasonably well to report a quarter-on-quarter growth in revenues in the September quarter. Analysts who attended recent conferences held by Infosys and Wipro say that the body language of executives at IT companies has improved considerably, confirming their view that a sharp recovery is on the horizon.
News flow is expected to be largely positive, which will help sentiment for IT stocks. Besides, investors in IT don’t have to worry about the increasing inflation in the domestic economy as investors in some other sectors have to. But while there’s little doubt that things have improved considerably, investors seem to be a little far too ahead of the curve, going by valuations of IT stocks. At 22 times one-year forward earnings, there’s little room for error. If, for instance, the rupee were to appreciate sharply, earnings estimates would have to be revised downward.
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