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Infosys Rides Tech Spending Strength

Analysts expect a strong earnings report from the IT outsourcing firm.

SAN FRANCISCO -- Investors are showing renewed enthusiasm for one of India's flagship tech services giants,


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, ahead of what is expected to be a strong earnings report late Wednesday.

The company's shares recently climbed about 1.5% to $54.86, on top of a gain of more than 3% Tuesday, as traders turned their focus to strong demand for tech support services, rather than profit headwinds like India's appreciating currency.

Early indications suggest that spending on IT services remains healthy. In late September,


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reported 23% revenue growth, in local currency terms. Robust sales growth in Europe gave investors hope that these regions can help offset an economic slowdown in the U.S., outsourcers' largest market. IT service providers have also indicated that they have been able to phase in price increases.

What's more, business from Infosys' largest customer bases has far outpaced overall market growth. In the last quarter, revenue grew 39% from financial services clients, 32% for manufacturing clients and 75% from telecom clients.

In light of the favorable outlook, Ashish Thadhani of Gilford Securities believes that Infosys' stock is retuning to a reasonable valuation after investor fears led to excessive selling. Gilford doesn't have an investment banking relationship with the company.

In past months,

investors lost confidence that Indian outsourcers could sustain their profit growth and competitiveness in the face of double-digit wage gains for Indian IT employees and a nearly 12% year-to-date appreciation of the rupee, India's currency, against the U.S. dollar. Infosys shares remain about 10% below their 52-week highs.

As the dollar depreciates, revenue from Infosys' largest market, the U.S., is worth less. Thadhani estimates that every 1% rupee appreciation against the dollar dents Infosys' profit margins by 0.5 percentage points.

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To offset currency fluctuations, outsourcers have tried to make better use of staff that would otherwise be sitting idly "on the bench" in India. In the previous quarter, the company's utilization rate of employees in low-cost offshore sites, a measure of how active they are on billable projects, rose slightly from 72.6% to 73.7%.

Infosys will have to find ways of increasing its utilization rate while competing for workers who it can assign to meet expected demand. It recently ratcheted up its hiring plans to 26,000 employees, a 34% expansion of its employee base in the first quarter.

A telltale sign of the competition for IT employees -- and the direction of their wages -- will be Infosys' attrition rate. In the first quarter, the attrition rate hit 13.7%, up from 11.9% a year earlier, as U.S.-based IT services firms like





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expand their employee base in India.

On average, analysts expect that company's second-quarter revenue jumped 33% to $992 million, lifting earnings by 31% to 46 cents a share, according to Thomson Financial. These estimates are slightly above Infosys' revenue guidance, in line with its earnings forecast.

The recent gains in the Bombay Stock Exchange have helped to boost Infosys' American Depository Receipts, which trade on the


. According to Thadhani, one risk to Infosys' stock price is a possible correction of the BSE, which has surged over 30% this year, vs. a roughly 10% gain in the

S&P 500 Index