For fiscal year 2011, the IT industry has given yet another supernormal wage hikes across all employee levels, thanks to improved demand outlook in US and increased competition in attracting talents.
IT biggies like TCS, Cognizant has given average wage hikes of more than 14-15%. Beside that, the salary level at which freshers and resources with experience range of 1-3 years were being hired has also gone up. Above that the bigger players like TCS, Infosys, Cognizant, Wipro, IBM, Accenture etc have been doing record hiring in the current fiscal and have got ambitious targets for the next fiscal as well.
All these cost push will hurt bottom lines of these companies in the fiscal year 2012. Smaller sized IT companies will suffer the most as they are not witnessing volume growth similar to bigger companies but their wage increases have been even more than their bigger counterparts.
Bigger IT companies like TCS & Infosys are trading at higher multiples which might contract going forward because of above concern, hence they can be avoided untill they correct to levels where they start looking attractive in terms of forward year multiples.
A forward year PE of 16-18 for Infosys and TCS would be good level to start buliding position.
Midcap IT companies are already trading at depressed multiples and they will continue to do so because of higher margin pressure that they will witness in FY-12. Here in this case much of a price correction is not expected but rather time correction will happen. Hence fresh investment can be looked into some of the high quality midcaps like NIIT Tech, Zensar, KPIT Cummins, Hexaware after a period of 6 months.