Which are the top 5 IT companies in India? Quantitative analysis of Indian IT sector based on 8 parameters.
Quantitative Analysis of Indian IT Sector
Introduction
In this blog, we will do a quantitative analysis of IT sector in India. India’s IT Industry contributed around 7.7% to the GDP and its contribution is expected to rise up to 10% by 2025. India is considered as largest sourcing destination for talented technicians in the world. Due to the pandemic, most of the organisations have adopted “Work From Home” structure and are relying more on IT services. Thus, IT spends across the globe are expected to increase over 2020-2024. This is one of the major reasons for the recent rally in IT stocks.
Please note that this analysis is done with the only purpose of screening good companies. Analysis done is completely on quantitative basis. No suggestions are being made to directly go and invest in the top scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top scoring companies in this analysis and take investment decision based on risk profile.
Indian IT Sector Quantitative Analysis
Companies selected for analysis
We have selected the following five IT sector companies for our quantitative analysis.
These 5 companies are analysed on following 8 parameters and given ranks and points accordingly. For example, if a company has higher PE ratio, it is ranked lower , hence has scored lesser points. Similarly, if a company has higher RoE, it is ranked higher and has scored higher points.
Here , 1 means that the company has scored lowest points and 5 means the company has scored highest points.
At the end, sum of all the points is taken and companies are again ranked on the basis of maximum points scored by each company.
1. PE
Company
Market Cap (Rs. Crore)
PE
Ranks
Points
TCS
₹8,45,600
27.09
5
1
Infosys
₹4,04,982
23.83
4
2
HCL Tech
₹1,93,430
16.45
2
4
Wipro
₹1,55,462
15.99
1
5
Tech Mahindra
₹70,815
17.5
3
3
TCS is the second biggest company in India according to market capitalization, followed by Infosys.
However, free float capitalization of Infosys is quite higher as compared to TCS due to which Infosys has a higher weightage in IT Index as compared to TCS.
PE is basically how much an investor pays for each rupee of profit earned.
Since Wipro is available at quite lower valuations, it is ranked at first position and has highest points.
Similarly, TCS is most expensive among the lot, hence it is ranked at last position and has lowest points.
2. RoE
Company
ROE
Ranks
Points
TCS
37.21%
1
5
Infosys
25.24%
2
4
HCL Tech
23.87%
3
3
Wipro
17.40%
5
1
Tech Mahindra
19.13%
4
2
One of the return ratios that is usually considered is RoCE, however IT Industry is not a capital intensive industry. Hence, RoCE is not a relevant return metric for this sector.
Also, as IT sector is not capital intensive, most of the companies have negligible debt. Hence, we have not considered D/E and Interest coverage ratio in this analysis.
Another return ratio that is used widely in fundamental analysis is Return on Equity (RoE) which is given as Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
TCS has highest RoE of 37.21% because of better operating efficiencies and hence it is ranked at no.1 position.
Wipro, on the other hand has lowest RoE due to which it is ranked at lowest position.
3. Employee Cost as % of Net Sales
Company
Employee Cost as % of Net Sales
Ranks
Points
TCS
55%
4
2
Infosys
56%
5
1
HCL Tech
49.5%
1
5
Wipro
53%
3
3
Tech Mahindra
51%
2
4
Since human capital is the major asset for IT sector, it is important to look at the employee cost w.r.t sales.
HCL Technologies has lowest employee cost structure as they have more on variable (performance based) compensation rather than fixed compensation.
Infosys, on the other hand, has highest employee costs and hence it is ranked lowest.
4. Operating Profit Margin (%)
Company
OPM
Ranks
Points
TCS
26.80%
1
5
Infosys
25.08%
3
3
HCL Tech
25.67%
2
4
Wipro
20.54%
4
2
Tech Mahindra
14.72%
5
1
Operating Profit Margin is the most important parameter as smaller IT companies usually sacrifice their margins to acquire new projects.
As the “Work from Home” culture takes shape in India, operating costs of IT companies are expected to go down, resulting in robust margins and profitability.
Despite higher employee costs, TCS has managed its overhead costs much better than other peers, resulting in highest operating profit margins.
Tech Mahindra has comparatively lower margins and hence it is ranked at lowest position.
5. 5- Year Sales growth
Company
5- YearSales growth
Ranks
Points
TCS
10.64%
3
3
Infosys
11.23%
2
4
HCL Tech
17.07%
1
5
Wipro
5.42%
5
1
Tech Mahindra
10.26%
4
2
As seen, HCL Tech has highest 5- year sales growth and hence it is ranked higher.
Wipro has muted sales growth over 5 year horizon and hence it is at the lowest rank
6. 5-Year Net Profit growth
Company
5-YearNet Profit
Ranks
Points
TCS
10.85%
2
4
Infosys
5.89%
4
2
HCL Tech
11.47%
1
5
Wipro
3.08%
5
1
Tech Mahindra
8.91%
3
3
If we take a look at the 5 year sales and 5 year net profit growth, we can see that for most of the companies costs are higher as compared to sales.
This results in profits not growing at the same rate as sales.
Main reasons behind this could be immigration issues mainly in US, foreign currency fluctuations, etc.
7. 3- Year Sales growth
Company
Sales
Ranks
Points
TCS
9.99%
2
4
Infosys
9.85%
3
3
HCL Tech
14.11%
1
5
Wipro
3.31%
5
1
Tech Mahindra
8.16%
4
2
For 3 Year Sales growth as well, HCL Technologies is leading , whereas Wipro is lagging. Hence, they are ranked accordingly.
8. 3- Year Net Profit growth
Company
NetProfit
Ranks
Points
TCS
7.11%
3
3
Infosys
5.09%
4
2
HCL Tech
8.86%
2
4
Wipro
4.61%
5
1
Tech Mahindra
12.87%
1
5
For Net profit growth over 3 years, Tech Mahindra is the leader as compared to other companies.
This shows that Tech Mahindra has increased its efficiencies over last 3 years.
Final Points
As seen, HCL Technologies, on the back of consistent performance has scored highest points followed by TCS, Tech Mahindra, Infosys and Wipro.
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