Indian IT vendors have demonstrated robust strength since the past two quarters, driven by uptick in discretionary spend and pent-up demand. We expect them to report lower volume growth than in Q2FY11 as

Q3 is considered a seasonally weak quarter with lower working days. Better clarity on the demand environment would emerge after budgets are finalized by clients early next year.

MACRO ENVIRONMENT

Accenture's strong revenue growth in outsourcing signals a positive trigger for Indian IT vendors.

Robust growth in Oracle's license sales indicates higher discretionary IT spend.

Increased expectations of US GDP growth will further drive the global economic environment and raise demand for IT services.

Presence of Indian IT vendors is growing in industrywide IT contracts, according to TPI.

Q3FY11 EXPECTATIONS

Muted volume growth as compared to Q2FY11: We expect volume growth of 5-6% for most Indian IT vendors, led by sustained demand for IT services. Lower volume growth would be largely because of Q3 being a seasonally weak quarter.

Stable pricing: Pricing is expected to remain flat for large Indian IT vendors. Some mid-tier vendors may see uptick of 1-2% in pricing because of their niche offerings. We expect pricing to turn positive toward end-FY11.

Cross currency impact - A mixed bag: All Indian IT vendors will experience a favorable cross currency impact of ~1.2-1.5% on reported USD revenue, led by strengthening of EURO and GBP vs. USD. However, appreciation of rupee against USD would have a negative impact of ~3.7% on INR revenue.

No positive trigger for margins: EBIDTA margins for all Indian IT vendors are expected to be flat or dip marginally. Appreciation of rupee against USD will have a negative impact on margins. Peaked-out utilization and no further ramp-up in offshoring are expected to stress margins further.

Clients' perspectives for FY12: Q3FY11 will also engender a better picture of spending pattern of clients for FY12 and their focus on IT. This quarter will be an early stage for finalization of budgets and we expect positive commentary by the managements in this regard. Based on our interactions with IT companies, initial indications are that clients' budgets would be largely flat to positive with increased thrust on outsourcing/offshoring.