Not the end of the story

But Infosys has also said that global technology spending is likely to remain flat. It has said that pricing pressure will continue. Infosys' earnings estimates lead to a price-earnings to growth ratio of around 1.3, a rather rich valuation.

And the story so far has been that the smaller software companies, which have lower valuations, have been affected still more by the downturn. That should, at first blush, seem like a recipe for a sell-off in technology.

But the market has taken Infosys' guidance as proof that the IT outsourcing story continues. Infosys' volume growth will come from more offshore work.

There is also a feeling that, while Infosys and its peers will benefit from outsourcing from the big companies, smaller US companies, unable to afford Infosys' billing rates, will partner with the smaller Indian software firms. Better-than-expected results from Infosys, Mastek and Mphasis BFL have contributed to the feeling that the worst is over for the sector. As for the valuations, Infosys' PE growth ratio compares favourably with that of a company like Hindustan Lever.

Consider Infosys' margins and its return on capital, and a case can easily be made for some upside to the stock. Also, allowance must be made for Infosys' estimate of flat growth in this quarter, which means that growth in the succeeding quarters will be higher than that projected for the whole year.

And although the target seems challenging, Infosys is known to have more than met its guidance in the past. The smaller software companies, with their lower bases, may also show higher growth, and these stocks have in fact outperformed Infosys over the past few months. All these factors have contributed to the upbeat sentiment.

Nevertheless, while the feeling of relief is palpable, it is also true that the upside for the sector continues to be limited. Following a sectoral boom and bust, it is always a different sector that leads the next boom.

Will the sector be reinvigorated by the growth in Business Process Outsourcing (BPO)? While the potential in this sector is undoubtedly immense, two key factors need to be taken care of. The first is the need to scale up manpower rapidly, given the far lower billing rates.

The second is the need for foreign companies outsourcing their operations to ensure security and quality, which often leads to setting up e-CRM centres offshore, rather than outsourcing the work. Indian companies are trying to address this problem by entering into joint ventures with companies that intend to outsource their operations.

However, there is little doubt that, with telecom capacities being expanded and costs tumbling, both IT services and BPO  will benefit. To be sure, Infosys' projections show that growth in software exports will continue to be limited this fiscal. But "outsourcing to India" story is alive and well.  This could be the right time for Indian software companies to use their cash for acquisitions.