Growth in Q3FY11 was in line with our expectations. Toptier Indian IT vendors reported USD revenue growth of 5.5-7.5%QoQ, primarily driven by volumes. Wipro, Infosys and TCS recorded marginal uptick in pricing. EBIT margins remained flat for all the top-tier vendors. At the PAT level, TCS outperformed the most against our and street’s expectations.

Quarterly performance snapshot – On the top-line front, performance of Iarge Indian IT vendors was in line with our expectations. In terms of EBIT margins and PAT, the companies surpassed our expectations due to higher FPP component, increased offshoring and strong forex gain.

Business growth indicators

High client mining – In the absence of mega deals, an effective strategy of increased client mining will help companies drive volume growth.

Lower ADM contribution – Contribution from ADM was flat or dipped slightly. It is expected to dip further with the IT companies expanding towards new service lines.

Discretionary spend uptick – It would remain strong and dominate other service lines in terms of growth.

Emerging verticals outperform – Emerging verticals such as healthcare, energy and utilities are expected to outperform others.

Strong USD revenue growth – The growth momentum in USD revenue for large Indian IT vendors is expected to continue on the back of robust volumes and marginal uptick in pricing.

Margin drivers

• Lower addition of laterals is expected. • FPP should grow, led by cost cutting by clients. • There seems to be further scope for increased offshoring. • Pricing should improve marginally.

We continue to be positive on the IT sector with preference for the large Indian IT vendors. We believe the next phase of growth will be driven by the aforementioned growth drivers, where the large Indian IT vendors seem more favorably placed than the mid-tier ones.