TCS leads IT upswing, but can it remain investors' darling?

The third-quarter results of information technology (IT) software leaders indicate that the turnaround in the world's developed economies is a rising tide that is lifting virtually all boats.

In fact, IT's export dependence appears near total with the incremental numbers for industry leader Tata Consultancy Services (TCS) being driven solely by export earnings.

On the face of it, if this trend continues, it will add to the cyclicality of the industry. But, considering that the demand for Indian IT majors is picking up faster than overall growth in the mature economies (in a recession, there is a compulsion for firms to modernise in order to survive), the cyclicality is moderated.

It is not just TCS that has done well. After Infosys, HCL has also chipped in - even Wipro, a laggard for a long time, appears to be set on a revival path.

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Against this backdrop, TCS has pulled its weight well. It seems set for at least 30 per cent top-line growth in the full financial year, surpassing its performance in the previous year. It is also likely to remain ahead of the number two. 

What is more noteworthy is the story contained in the bottom line. TCS has improved its net margin for two quarters now and appears set to usurp the top slot long held by Infosys.

TCS has long led in size, but that it is the most profitable as well as the biggest is indeed creditable.

This indicates that the firm is able to handle scale, stay abreast of technology, keep customers happy, and also charge a very decent price.

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Where statistics are catching up for not only TCS but also other fancied IT leaders is in investor expectations. 

The day after TCS posted the results that underlined its market leadership - except for domestic sales, whose share is low - its stock fell by a massive 5.8 per cent, while the BSE infotech index went down by 2.6 per cent.

In recent months, fancied IT shares have had a very good run, which indicates that the market appears to have fully anticipated the current recovery and discounted it.

So it is now time for profit booking.

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Over the next few quarters, it will be odd - yet rational - to expect IT companies to keep doing well but investors to yawn.

IT valuations will grab headlines again if one of the following two scenarios - or a combination of both - plays out: one, if global recovery becomes sufficiently robust so as to cause tech spending (developing new products) to take off again; alternatively, if Indian IT leaders graduate to a higher-technology platform than the one they are on now.

Importantly, if Indian IT wishes to take its destiny into its own hands, it will have to ensure the latter.

Then a day could come when a malfunctioning US affordable healthcare IT platform would be handed over not to an Accenture but to an Indian leader.