In this article, we will cover
IT Sector Stocks India - An OverviewThe IT sector is one of the most crucial sectors of the Indian industry as well as one the largest drivers of export revenue for the country. The industry currently contributes to about 7.7% of GDP and is expected to contribute to about 10% by 2025. India is currently the largest IT services provider in the world. The country has an edge primarily due to the availability of highly skilled and less costly manpower available. India is the leading sourcing destination in the world, serving about 55% of the global service sourcing market of an estimated size of USD 185-190 billion and a 38% market share of the BPM sourcing market.With the onset of COVID-19, governments across the world have restricted movement of people to avoid the spread of the virus. Due to this step, the majority of the companies have had to enable “work from home” setups for their employees so as to continue the daily operations of the company. This has presented a great opportunity for IT companies as businesses across the world have been updating and developing their IT infrastructure so as to ensure seamless working among employees while maintaining constant interaction with their clients.The pandemic has highlighted the importance of having a proper IT infrastructure to ensure efficient continuation of businesses and accelerated the push towards digitalisation across the globe for all companies ranging from small local companies to large conglomerates, who are now focusing more towards developing and upgrading their infrastructure for both consumer facing and operations related services. Along with this, a lot of IT enabled businesses have emerged during these times. This environment provides the IT industry with great business opportunities over the long term driving growth for IT companies.As investments, IT companies are known to carry negligible to no debt on their balance sheets. They are usually asset light as no major capex is incurred due to the focus being towards providing services which enables them to generate high profitability and return ratios for investors (ROE being in the range of 20-30%) while maintaining sufficient liquidity on their books.Loving the valuable content? Invite friends to Samco to explore our informative blogs. Earn voucher rewards for each successful referral. Start referring now and reap the rewards
List of IT Stocks to Buy in India
|S.No.||Name||NSE||BSE||CMP Rs. (as of 19/12/2022)||Rank||Industry|
|4||HCL Technologies||HCLTECH||532281||₹ 1,033.00||4||IT|
|5||Tech Mahindra||TECHM||532755||₹ 1,026.00||4||IT|
|8||Oracle Fin.Serv.||OFSS||532466||₹ 3,010.00||4||IT|
|9||L&T Technology||LTTS||540115||₹ 4,014.00||3||IT|
|11||Tata Elxsi||TATAELXSI||500408||₹ 6,372.00||3||IT|
|12||Persistent Sys||PERSISTENT||533179||₹ 3,961.00||3||IT|
|13||Happiest Minds||HAPPSTMNDS||543227||₹ 940.00||0.5||IT|
|14||Tanla Platforms||TANLA||532790||₹ 746.00||0.5||IT|
|16||Route Mobile||ROUTE||543228||₹ 1,284.00||4||IT|
|17||Intellect Design||INTELLECT||538835||₹ 425.00||0.5||IT|
|18||Birlasoft Ltd||BSOFT||532400||₹ 300.00||1||IT|
- Identify the verticals and their size in the revenue of the company: IT companies service various verticals such as Banking and Financial Services, Insurance, Pharma, Communications, Media & Technology, Energy & Utilities and Manufacturing among others. The key is to find companies which are well diversified across verticals and services. Verticals which are more stable and have sound growth prospects will drive returns for the companies.
- Identify the geographic distribution of revenues: IT companies service countries across the world such as the US, Europe, Asia among others. Investors need to see the revenue share from different countries and also assess the currency exchange rate movement of India with that of the foreign currency to identify any foreign currency gains/losses which can significantly affect the earnings of the company.
- Identify the financial performance of the company: One needs to look at the performance of the company over time and against its competitors using metrics such as ROE, ROCE, P/E ratio, Cash flow from Operations and profit margin ratios among others to give an understanding about the financial position of the company and whether its financials are strong to deal with in challenging times.
- An investor also needs to assess the product offerings and the order inflow for the companies so as to ascertain the revenue flows expected for the company. Another aspect to keep an eye out for is the R&D spending of the company as technology is significantly influenced by new discoveries which can impact the business.
- IT companies are known to regularly give out dividends and conduct share buybacks as a way of giving back money to shareholders. Investors should assess the frequency and the amount of these which can also indicate stability in earnings and returns on investments. While companies conducting these activities are good for shareholders, one should assess the fact that the company maintains enough cash for expenses and inorganic and organic growth opportunities as well.
Portfolio Companies in IT Stocks
Tata Consultancy Services LtdTata Consultancy Services Ltd is the largest IT company in India by Market cap and the world’s largest IT Services provider. The company is involved in providing a wide spectrum of services such as IT Services, Consultancy, business solutions, digital transformation, and IT products and platforms. The company is also foraying into newfound and developing technologies such as cloud-based computing, machine learning, AI and Blockchain-based technology. Its majority revenue segment is BFSI which forms 40% of the total revenue pie for the company followed by Retail and CPG, Communications, Media and Tech, Manufacturing, Life Sciences and Healthcare and Energy and Utilities among Public and Others. TCS’ major revenue generation is from North America contributing to about 51.3%, UK and Europe ex-UK are around 31.9% while India is the least at 5.1%.The company has a proven track record which is reflected in the company’s financials as it has been delivering industry leading results such as 5-year average RoE of 37.2%; an operating profit margin of 26.6% and high cash flow generating business with Net Cash flow at about Rs 5,630 crore for FY22. TCS has also seen consistent growth with revenue growing at a CAGR of 10.2% over the last 5 years while the net profits saw a 7.8% CAGR for the same period.Though the company has delivered strong financial performance, the stock carries premium valuations vs its peers a P/E ratio at 29.6x vs industry average P/E of 24.2x. While the P/E is higher, the premium is justified as TCS has also delivered industry leading growth and returns for shareholders.A key risk for the company lies in the fact that the company may not be able to deliver growth at a similar pace as in the past, thereby taking away the premium valuations the stock commands and impacting the share price negatively.
Infosys LtdInfosys Ltd is currently the 2nd largest IT service provider in India. The company is engaged in providing a wide array of IT services to clients across the globe and across multiple verticals such as the US, Europe, Asia and the rest of the world. The company is also engaged in the development of new technologies to better service clients. The verticals it serves are BFSI, Retail & CPG, Communications, Energy & Utilities, Manufacturing and Hi-tech. The geographical breakdown spans across North America, Europe and India and the rest of the world.The company has delivered a strong financial performance with a 5-year average ROE 25.8% while managing to deliver an Operating profit margin of 24.4%. It has delivered a 12.2% CAGR growth in the top line and a 9.16% CAGR growth in the bottom line the last 5 years. The company currently has a P/E ratio of 27.7x, being relatively fairly valued among its peers. Infosys faces risks from whistle-blowers. In the past, it has been successful in allaying any concerns but multiple claims may still harm their reputation.
HCL TechHCL Tech is a leading global IT Services company. It is ranked among the top five Indian IT services companies in terms of revenue. The company has been focused on transformational outsourcing since its entry into the global market following its IPO in 1999. In FY22, the company revenue grew by 12.8% in CC, and Its IT services grew by 14.5%. The growth in IT services has been the fastest in the past five years. The company has been experiencing good demand from AWS and thus has been hiring aggressively in this segment.The company’s ER&D segment also grew strong at 16.8% in FY22. This segment would be a significant driver of its growth. The company’s margins are improving and its growth coming in line with its top peers. The company also provides an attractive dividend yield of 3.7%. Considering the beaten-down valuations, future growth and margin expansion provide a strong case for the stock.
Larsen & Toubro Technology Services LtdLarsen & Toubro Technology Services Ltd is a market leader in five key segments: transportation, telecom and hi-tech, industrial products, plant engineering, and medical devices. LTTS is positioned to leverage and capitalize on the emerging opportunities arising from Electric Autonomous and Connected Vehicles, 5G, AI and Digital Products, Digital Manufacturing, Medtech and Sustainability.The company has a robust financial profile and a debt-free balance sheet, with cash surpluses of Rs. 1970 crore as of March 31, 2022. During FY22, it registered revenue of Rs 65,697 million, a growth of 21% Y-o-Y, and a Net profit of Rs 9,570 million, a growth of 44% Y-o-Y. The company has a strong track record of return on equity (ROE) and return on capital employed with an average of 25.2% and 32.7% over the last 3 years.
PersistentPersistent was able to produce 5% q-q cc growth (organic) in the first and second quarters of FY23 despite weakening in its largest customer. This growth was fueled by new business wins with both old and new clients. Persistent will be able to produce 4% q-q cc growth over the coming quarters thanks to a solid deal winning trajectory and a strong pipeline with a trailing 12M total contract value (TCV) of USD368mn (including renewals, +30% y-y) and new deal TCV of USD228mn (+53% y-y).The company's numerous long-term partnerships with well-known global brands have increased its commercial stability and offered long-term visibility. The company will be able to deliver a higher growth trajectory than its competitors thanks to a solid deal pipeline and strong revenue growth momentum in the Services vertical as well as in Allied businesses.
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Model PortfolioIn order to get an exposure to best Indian IT stocks, you would need a total of approximately ₹30,787 for the below curated portfolio as of 19th Dec 2022.
|Company Name||Weightage||CMP (As of 19th Dec)||Quantity||Total|
|Tata Consultancy Services||0.208||3202||2||6404|
|L&T Technology Services||0.13||4014||1||4014|
|S.No.||Name||NSE||BSE||Industry||Rank||CMP Rs. (as of 19/12/2022)||Mar Cap Rs.Cr.||Net worth Rs.Cr.||P/E||OPM %||ROE %||ROCE %||Sales Var 5Yrs %|
Profit Var 5Yrs
|4||HCL Technologies||HCLTECH||532281||IT||4||₹ 1,033.00||₹2,80,253.00||₹61,241.00||20.3||22.4||22||25.4||12.5||9.36|
|5||Tech Mahindra||TECHM||532755||IT||4||₹ 1,026.00||₹99,923.00||₹26,787.00||18.9||16.1||21.5||26.6||8.91||14.7|
|8||Oracle Fin.Serv.||OFSS||532466||IT||4||₹ 3,010.00||₹25,984.00||₹6,433.00||14.4||44.2||27.1||36||3.36||9.07|
|9||L&T Technology||LTTS||540115||IT||3||₹ 4,014.00||₹42,397.00||₹4,452.00||39.7||21.5||24.5||30.8||15.1||17|
|11||Tata Elxsi||TATAELXSI||500408||IT||3||₹ 6,372.00||₹39,686.00||₹1,692.00||59.2||32||37.2||47.7||14.8||25.9|
|12||Persistent Sys||PERSISTENT||533179||IT||3||₹ 3,961.00||₹30,280.00||₹3,525.00||37.4||17.5||21.5||26.3||14.7||17|
|13||Happiest Minds||HAPPSTMNDS||543227||IT||3||₹ 940.00||₹13,803.00||₹737.00||65.7||24.6||30.6||31.2||19.1||112|
|14||Tanla Platforms||TANLA||532790||IT||0.5||₹ 746.00||₹10,133.00||₹1,487.00||19.9||19.4||48||58.8||40.8||67.5|
|16||Route Mobile||ROUTE||543228||IT||3||₹ 1,284.00||₹7,994.00||₹1,661.00||34.4||11||14.3||17.1||34.3||22.3|
|17||Intellect Design||INTELLECT||538835||IT||0.5||₹ 425.00||₹5,765.00||₹1,837.00||18.6||21.3||21.3||24.8||15.5||63.5|
|18||Birlasoft Ltd||BSOFT||532400||IT||0.5||₹ 300.00||₹8,203.00||₹2,332.00||17||15.1||19.3||24.9||4.46||16.1|
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