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Over the last one year, these stocks have seen a significant re- rating from single-digit price-earnings multiples to 20-plus levels.
While from the earlier depressed levels a re-rating may have been justified, the growth in earnings that these companies are likely to experience over the next 12-18 months seems to have already been factored into their prices.
In the last one month, these stocks have moved between 4 and 7 per cent, on the back of strong rally over the last one year. All these stocks trade at 23-24 times trailing earnings, at a significant premium to the broader markets.
This means that these stocks may no longer fall in the defensive category that they did earlier.
Even on a forward basis, these companies would trade at over 20 times earnings, if they grow their earnings by about 15 per cent, which in itself may not be all that easy.
Strong volume (person-months billed) growth for all the three companies, ramp-up in top clients' revenue run-rate (for TCS, Infosys) and revival in revenues from banking, financial services and insurance and the US geography have been key positive for these companies.
Revival in growth of client IT budgets has also been indicated, but these have been in the form of lower-billed and non-discretionary services such as application development and maintenance.
Challenges But there are several challenges ahead as well.
For one, the rupee's appreciation against the dollar to 45.9 levels currently and the expectation that it would strengthen further may mean lower realisations in future quarters.
With the revival in the economy, attrition has seen an increase, to stem which a wage hike is almost a certainty for all these companies in the next couple of quarters.
That is a margin-deterrent. Pricing increases still have not taken place.
While from the earlier depressed levels a re-rating may have been justified, the growth in earnings that these companies are likely to experience over the next 12-18 months seems to have already been factored into their prices.
In the last one month, these stocks have moved between 4 and 7 per cent, on the back of strong rally over the last one year. All these stocks trade at 23-24 times trailing earnings, at a significant premium to the broader markets.
This means that these stocks may no longer fall in the defensive category that they did earlier.
Even on a forward basis, these companies would trade at over 20 times earnings, if they grow their earnings by about 15 per cent, which in itself may not be all that easy.
Strong volume (person-months billed) growth for all the three companies, ramp-up in top clients' revenue run-rate (for TCS, Infosys) and revival in revenues from banking, financial services and insurance and the US geography have been key positive for these companies.
Revival in growth of client IT budgets has also been indicated, but these have been in the form of lower-billed and non-discretionary services such as application development and maintenance.
Challenges But there are several challenges ahead as well.
For one, the rupee's appreciation against the dollar to 45.9 levels currently and the expectation that it would strengthen further may mean lower realisations in future quarters.
With the revival in the economy, attrition has seen an increase, to stem which a wage hike is almost a certainty for all these companies in the next couple of quarters.
That is a margin-deterrent. Pricing increases still have not taken place.
