Upside Gets Outsourced for Indian IT

Infosys recently told investors to expect sales to grow 46% or 47% this year and for profits to increase by 45%. Wipro does not give annual guidance, but Hambrecht's Nadkarni is expecting 38% revenue growth. "These are conservative companies," he said, "and I think their guidance is conservative. And given that increase in fundamentals, I don't think these companies are overvalued." (Hambrecht does not have an investment banking relationship with the companies mentioned in this story.)

Similarly, Thadhani said, "Yes, they have had a terrific run, and maybe there is some need to pause and consolidate gains. But fundamentals will continue to improve as we head into next year," he said.

Thadhani saw the "unprecedented hiring burst in the Indian IT sector" in the September quarter as a sign of increased confidence in future business by the outsourcers. Wipro, for example, boosted its workforce by 10%, or 5,500 new employees, in the quarter.

Still, others feel the stocks are getting too rich for comfort. "These are expensive companies and you need to be cautious," said Mark Headley, president of Matthews International Capital. Headley notes that the premium paid for depositary shares in the U.S. (vs. "native" shares in India) is very steep.

Infosys, he said, is currently trading at a 59% premium over Indian shares, compared with an average premium of about 54%, while Wipro's premium is about 54%, compared with its usual 33%. "When you get to these valuations, any negative surprise is a challenge," said Headley, whose company invests directly in India, but does not hold shares of the outsourcers in the U.S.

Headley's warning is well-taken. But no immediate evidence exists that the outsourcing tide is ready to ebb.