Market Expectations from Infosys

The guessing game begins as volume growth and dollar revenue to remain strong in Q4 FY10, boosted by the ongoing IT budget recovery. Analysts expect Tier I vendors to report 5-5.4% dollar revenue growth, backed by similar growth in volumes.

Infosys guidance for rupee EPS is likely to be 117-120, implying YoY growth of 6.6-9.4%. Expect dollar revenue guidance at 15-18% and rupee revenue guidance at 12-15%. This could disappoint investors who are pricing in 18-20% EPS growth, as indicated by valuations at 22.7x FY11E. We believe Infosys EPS guidance needs to come in at 12-13% YoY to sustain momentum in stock prices.

Expect more cues on FY11 growth in the form of hiring announcements and wage increases. We expect utilisation rates to decline for TCS and Wipro as hiring picks up. Current market expectations are that Infosys will offer lower wage increases (i.e. less than 8% offshore) given the non-seasonal wage hikes offered in October 2009. TCS is likely to announce 8-9% offshore wage increases as well.

The cyclical recovery in the sector is fully priced in, while the structural slowdown in the sector, on account of slower demand growth and increased competition are yet to be priced in.