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IT: Will purse strings be loosened in 2011?

Last updated on: December 21, 2010 13:07 IST

IT: Will purse strings be loosened in 2011?

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Sunaina Vasudev & Ujjval Jauhari in Mumbai

Ahead of their expenditure decisions in January 2011, most companies in the US are sitting on huge cash piles.

However, the biggest question for the Indian information technology sector is whether purse strings will be loosened for discretionary spending in 2011 or not.

While most Tier-I companies have gone on record about the positive demand feedback, analysts suggest Infosys has been cautious in sticking to a positive short-term outlook, but expect budgets to stay flat in the year ahead (up two per cent), given macro uncertainties in a stable pricing environment.

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Most Indian IT stocks performed well last week on expectations of robust US demand and resultant IT revenue growth.

The US has also seen relatively more positive economic indicators, including an uptick in the ISM Purchasing Managers Index, according to Macquarie Research.

Another positive is the strong growth reported by Accenture and Oracle (highest in the last 10 quarters).

Accenture revised the earnings growth guidance to 8-11 per cent year-on-year for 2010-11 from 7-10 per cent.

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Oracle also expects licence revenues to grow 10-20 per cent year-on-year in the next quarter, making a strong case for demand sustainability and a revival in discretionary spending, suggests a Prabhudas Lilladher report.

However, the momentum still lies with large Tier-I companies, especially Infosys and TCS, say analysts.

A Motilal Oswal report says Infosys is most closely levered to higher discretionary demand, with additional margin levers from improving utilisation, even as attrition rates stabilise.

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ICICI Securities believes TCS is best placed in terms of supply chain management, while HCL Tech is most levered to an expected uptick in discretionary spends in the midcap space.

The December quarter results are expected to be strong, although currency may have some impact on margins, given the forex volatilities.

Macro uncertainties, especially in the euro region, are a key risk.

However, if more positive news on discretionary spends flows through, expect some earnings upgrades.



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