The story does have a happy ending after all. The stock market darlings-turned-pariahs have turned favourites once again, so much so that the markets can’t seem to get enough of them. Yes, we’re talking about those much-loved tech stocks which have been buzzing since Infosys declared its December 2009 quarter results; the allure has only got stronger after Tata Consultancy Services followed up with a stellar performance, beating estimates by a huge margin. That was more than enough to turn the investors’ love affair which had turned cold to sizzling hot again. Some even believe this could be the beginning of another major growth cycle for the IT services industry. “It feels like 2004 all over again with Infosys’ results pointing to a major upcycle in outsourcing, driving earnings up to levels not imagined until recently,” says CLSA’s Bhavtosh Vajpayee in a result update. “When outsourcing rains, it pours. And pour it will in 2010, as we think the stars are perfectly aligned for a big year for Indian tech.” He’s not the only one batting for the industry - a whole host of analysts have given tech a huge thumbs-up. Price targets and earnings have been upgraded for both Infosys and TCS. Let’s take a look at the numbers that got this party going.

It’s the first time in six years that Infosys has reported such a strong December quarter, with dollar revenues rising by 6.7 per cent from the earlier quarter -- the highest in nine quarters. The December quarter is usually considered weak for tech companies as it has a fewer number of working days, which affects volume growth. But this quarter proved to be an exception to the rule as growth emerged across all industry verticals, even from the troubled telecom and manufacturing sector, which reported a 4 and 6 per cent growth (QoQ) respectively. New deals have been signed at better rates (14 deals with higher average prices), indicating an improving price environment. Prices improved by 1.1 per cent for Infosys. Margin management, the company’s strong point, was also good as operating margins improved by 90 basis points to 35.5 per cent, instead of the estimated decline of 200 basis points. The company is also back in hiring mode - plans to hire freshers have been revised upwards to 15,000 from the earlier 10,000 planned tow months ago. For tech companies, hiring plans are often a barometer of future revenue growth prospects. That means all doubts about the sustainability of revenue improvement are fast flying out of the window.

Not to be outdone, Tata Consultancy Services, its closest rival, also released some strong numbers for the quarter. In a seasonally weak quarter, it reported a 6 per cent growth in dollar revenues from the previous quarter. In the earlier quarter, it had posted a strong 4 per cent jump in revenues. Volumes increased by around 6.6 per cent in the December quarter over the previous quarter, while pricing remained flat. The company signed 10 new large deals across verticals, which now gives it a healthy pipeline. Again, like Infosys, TCS announced big hiring plans indicating better times are still ahead. The company hired around 7,700 employees (net) in the past quarter and has indicated that it will hire about 11,000 people (gross) in the current quarter.

Analysts say they underestimated the strength of the cyclical recovery. Some of them are now factoring a 20 per cent-plus revenue growth in dollar terms over the next two years. So they say current valuations will become irrelevant when seen from such a growth perspective. While the December quarter was also helped by some pent-up demand, they say the outsourcing surge will drive a multi-quarter earnings upgrade cycle and that it will be hard to model the extent of growth possible. A bit like shooting in the dark, they say. For their sake and the sake of millions of investors who have put their faith in tech stocks, let’s hope they have it right this time. And if they do get it wrong, well, it won’t be the first time!