While the four earnings seasons in a year are almost always laden with high

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investor expectations, there is little evidence of any broad-based rally in the market in the run-up to the earnings numbers, except for a few sectors, such as technology.

An analysis of share movements one month before the earnings numbers shows technology counters such as Infosys, TCS, Wipro and HCL Tech draw huge investor interest ahead of their quarterly numbers. However, the same bullishness moderates after the results are out.

Experts say earnings whispers around top counters draw nimble-footed players, who build long positions ahead of the earnings seasons and liquidate the same just before or after the market gets to know the numbers.

In the just-concluded December quarter, the demand environment co­n­tinued to remain strong, and anal­ysts estimate average revenue growth of 6-7 per cent sequentially with an improvement in reported pricing, albeit by a small margin.

Till Friday, top IT stocks have generally gained between 5 per cent to 8 per cent over the past one month. HCL has gained 8.4 per cent, Infosys 6.3 per cent, TCS 4.9 per cent, Tech Mahi­ndra 5.3 per cent, while Wipro (whi­ch draws over 70 per cent revenues from IT) has seen its shares rise 9.8 per cent.

Infosys, as always, flags off the earnings season on January 13.

Mid-tier IT stocks have seen a bigger bounce. Hexaware has gone up nearly 18 per cent, Geometric by 9.4 per cent, Infinite Computers 14.7 per cent, Infotech Enterprises 13.3 per cent while Mphasis and Saksoft have risen nearly 12 per cent over the past one month.

“This kind of a rally happens on most technology counters ahead of the earnings season. You may call it investor expectation or speculation. The fizz goes out as results anno­uncements draw close. Even if some companies perform well (i.e. beat expectations or their own guidance), the stocks mostly fall in the post-earnings period.

For technology players, the earnings numbers for the third and fourth quarters are usually stronger than the first two quarters. So it is likely that this trend will be stronger during these periods. Investors should not be swayed by such short-term bounces and take a studied call later,” said K Rama­nathan, chief in­vestment officer at ING Inves­tment Management.

The fourth quarter of FY10 was an exception as fortunes of technology stocks were under heavy cloud amid a weak global macroeconomic scenario. From mid-March to mid-April (Infosys Q4 results were out on April 15), Infosys gained nearly 5 per cent compared with three-odd per cent rise in the Sensex. TCS’ 3 per cent rise was in line with the Sensex while HCL, Wipro, Tech Mahindra showed hardly any rise.

In the third quarter of FY10, the pre-earnings bounce in IT stocks was evident. Tech Mahindra gained 8.5 per cent against Sensex's 3 per cent gain in the one month before the earnings season. TCS jumped 12 per cent, Wipro 11 per cent and Infosys 9.4 per cent. This trend was maintained in six out of 10 quarters — cementing the hypothesis.

The post-earnings weakness is al­so true, and it might offer long-term investors a good entry point.

“The cornerstone to earning me­ga returns from any sector is in the ability to enter it at a cheaper point, which is not there in most IT stocks right now,” said S Naren, chief investment officer (equity) of ICICI Prudential AMC.

Post-earnings weakness was evident in the third quarter (Oct-Dec) of 2010 as well. Infosys fell 8 per cent in one month after its results, TCS shed 5 per cent, Wipro 12 per cent, HCL Tech 6 per cent while Tech Mahindra and Patni Com­puters lost between 11 per cent and 12 per cent, dwarfing 7 per cent fall in Sensex during the same period. The same trend was more or less repeated in 2008, 2007, 2006.

Analysts maintain that good entry points may emerge on top IT counters after the third quarter earnings are out in January-February. In terms of valuations, almost all top IT stocks — such as Infosys, TCS, Wipro and HCL Tech — are trading at premium valuations of 25-35 times their 12-month historical earnings.

Infosys has outperformed Sensex over the past two months. Given the challenges and its present valuations, there is ample scope of disappointment after the quarterly numbers, felt Pralay Das of Elara Capital.