Infotech cheer

Infosys Technologies' first quarter results for 2004-05 have comfortably beaten the street, both on revenues and earnings. Far more significant, though, is the upward revision in its guidance for this fiscal.

According to the company's revised estimates, income growth for the full year is expected to be around 40 per cent, while earnings per share are expected to grow at 34 per cent. That's a healthy rate of growth.

Given the fact that the Infosys management has traditionally been very conservative about guidance, the markets will undoubtedly re-rate the company, especially as it trades at a forward price-earnings ratio of well below its annual earnings growth rate.

But Infosys' revised guidance also sends another strong signal to the market "" a pointer whose implications go far beyond the effect on a particular stock.

Taken together with MphasiS BFL recent results and its management's upbeat assessment of prospects, the signal going out loud and clear is that the outlook for Indian software services has changed significantly for the better.

This is comforting, given the fact that there are powerful global headwinds that the sector will have to confront in the near future. For starters, while the Infosys management has said that the recovery in the US economy is one of the reasons for its excellent performance, the sustainability of that recovery is by no means certain.

Recent US growth has been driven almost entirely by expansionary monetary and fiscal policy. With the expected end of cheap money and tax cuts, growth could well falter in the coming quarters.

The other wild card continues to be the US elections.

While the debate over outsourcing seems to have lost steam in the last few months, nobody knows for sure what a Kerry presidency will do to protectionist sentiment in this area.

Moreover, there are already signs that the technology rally in the US is flagging, and that's not only because of slowing demand for chips and computers.

Many enterprise software companies have announced profit warnings on the plea that they weren't able to close major sales deals in the last quarter. It's possible, of course, that a part of the reason for that could be increased competition from the likes of Infosys.

Hopefully, India's far lower cost structure will ensure that the outsourcing story remains a driver of structural change in the industry.

Back home, Indian software stocks have stood up well to the market selloff over the last couple of months, thanks to their being perceived as safe havens, largely unaffected by the flip-flops of domestic politics and policy-making. But there are other, more fundamental, reasons favouring software stocks.

The Chinese slowdown, for instance, could have an impact on commodity prices, which could affect several Indian companies who either export to China or benefit from high commodity prices.

The current uncertainty surrounding the monsoons is another concern for companies that depend on the domestic economy. IT companies are insulated from these worries. Moreover, the recent depreciation of the rupee is another reason for being bullish.

The bottomline: Infosys' results could well lead analysts and fund managers to allocate more funds to Indian software companies within the global IT space, helping benefit not only companies like Infosys but also the TCS IPO.