Top 5 IT Stocks- Quantitative Analysis

Introduction:

The Indian IT industry is assumed to be worth $300-$350 billion in respect to revenue by the year 2025 (As per McKinsey Report). Owing to the expansion of the IT Industry, its contribution toward GDP will increase from 7.5% to 10% by 2025.

Indian IT companies have become the most favorite offshore destination for IT business for companies across the world. Not only this, the Indian IT sector serves clients across the globe in both On-shore Business as well as Off-Shore Business.

Growth of Intense Competition & accelerating growth in Cloud Service and Digital segments may work in favor of the IT companies.

Well-defined strategies and proper application of young talented minds may add a lot more to the revenue and growth of IT companies.

Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on a 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 decisions based on risk profile.

IT Sector Quantitative Analysis

Companies selected for Analysis:

We have selected the following five Large Cap IT companies for our Quantitative Analysis.

• Tata Consultancy Services (TCS)
• Infosys
• HCL Tech
• Wipro
• Tech Mahindra

The procedure of Analysis and its Interpretation

• These 5 Companies are analyzed on the following 21 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
• Here, 1 means that the company has scored the lowest points and 5 means the company has scored the highest points.
• In the end, we have added all the points together and companies are ranked accordingly.

Parameters of Quantitative Analysis:

1) PE Ratio:

• PE of a company means that how much investors should pay for the stock based on their current earnings. A company with a lower PE Ratio is considered to be undervalued and has a huge potential to unlock its value. Hence, full points will be rewarded to that company.
• With the lowest PE Ratio of 26.60 HCL Tech gets the first position and 5 points. And TCS with the highest PE of 37.21 among peers is awarded 1 point only.

2) EV/EBITDA:

• EV/EBITDA ratio measures Enterprise Value (EV) to the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). This ratio assesses the overall financial performance of the firm.
• EV/EBITDA of value below 10 is considered healthy.
• Here also, HCL Tech bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 14.07. TCS with the highest EV/EBITDA ratio of 24.25 receives the last position and one point only.

3) Stock Return % Since Previous Quarter:

• Tech Mahindra has yielded significant returns of around 94.2% in the last 1 quarter which has led to an increase in the market cap of the company from Rs. 69,026 Cr. as of May 10, 2021, to Rs. 1.34 Lakh Cr. in as on 13^th August 2021. With such phenomenal return, the stock is awarded 5 points and first rank.
• While, TCS has delivered a return of just 10.1% in the last 1 quarters, the lowest among the concerned 5 IT stocks, and hence ranked last.

4) Return on Equity (ROE):

• RoE signifies how well the company generates the return on shareholders’ investment. Companies with higher RoE are considered good.
• In this parameter, TCS outperforms other peers by scoring the highest ROE of 38.55% and hence obtains the 1^st position as well as 5 points.
• Tech Mahindra with the lowest RoE of 19.01% receives the last rank.

5) Debt-to-Equity Ratio:

• The debt-to-equity ratio is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
• Accordingly, the lesser is the debt, the better it is for the company, and vice-versa.
• Generally, IT Companies are Cash-rich companies, they don’t have such debts. But there are exceptions to this case.
• TCS and Infosys are debt-free companies and hence both are rewarded with full points and jointly share the first position.
• Wipro has the highest D/E ratio of 0.15 and is hence given 5^th rank. Likely, Tech Mahindra and HCL Tech have the D/E ratio of 0.07 each.

6) Interest Coverage Ratio:

• The Interest Coverage ratio is in direct relation with the D/E ratio. It can be calculated by dividing EBIT from Interest Expenses.
• This ratio gives the ability of the company to pay interest from its operating profit.
• Since Infosys and TCS are zero-debt companies, they maintain a good Interest Coverage Ratio. Infosys, with an Interest Coverage Ratio of 137.6, the highest among peers, gets the first rank.
• Due to a low-Interest Coverage Ratio of 28.3, Wipro is ranked and scored accordingly.

7) Pledged %:

• Only TCS have pledged their share of 0.47% and hence the company is given 5^th rank and 1 point as per rule.
• Any other companies on the list have not pledged their share and hence are rewarded with full points and first rank.

8) Institutional Holding (FII + DII):

• Institutional Investors (FII + DII) as a % of Free Float has the highest stake in HCL Tech, collectively of 87.1% and hence it is rewarded with full points and first rank.
• FIIs and DIIs also hold more than 84% stake in TCS and hence it secures the 2^nd position in this criterion and scores 4 marks.
• Wipro has the lowest stake of institutional investors of 57.5% in the Company’s shareholding pattern and hence is given 1 point only.

9) Employee Cost as a % of Net Sales

• IT sector employs human capital resources at a higher scale. Thereby, Employee Cost becomes a crucial part of the Operating Expense of IT Companies.
• Lower Employee Cost % implies higher operating margins and vice-versa.
• With lowest Employee Cost as a % of Net Sales is of Tech Mahindra i.e., 50.6% reserves better chance of expanding margins. Hence, it is rewarded with 5 points.
• Whereas, TCS has the highest Employee cost as a % of Net Sales of 56.5% and thereby scores 1 point only.

10) Operating Profit Margin (%):

• Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
• Here, despite having higher employee cost, TCS efficiently post the OPM of 25.5% and secures 1^st position.
• With the lowest OPM of 15.2%, Tech Mahindra has scored the last rank among the others.

11) Sales and Net Profit Growth- 5 Year CAGR:

• In terms of Sales Growth, HCL Tech posts the highest figure of 14% and hence gets the full points. Here, Wipro got the 5^th position, on accounts of its lowest sales growth on 5 years CAGR basis.
• HCL Tech has registered the highest Profit After Tax (PAT) growth on 5 years CAGR basis of 8.61s% and hence is rewarded with the first rank. Here again, Wipro presents its laggardness and delivers a mere 3.92% PAT and therefore scored and ranked accordingly.

12) Sales & Net Profit Growth: 3 Year CAGR:

• On a 3-Years CAGR basis, HCL Tech again outscores the other players with 14.11% Sales Growth and receives the first position and 5 points as well. Wipro continues to deliver poor performance and post Sales Growth of 4.37% and hence is rewarded the last rank.
• Concerning Sales Growth on a 3-years CAGR basis, Infosys, TCS & Tech Mahindra are ranked 2^nd, 3^rd, and 4^th respectively & their sales growth accordingly are 12.52%, 10.07%, and 7.15%.
• While Wipro ranks first with the highest PAT growth of 10.50% on a 3-Years CAGR basis. With the lowest PAT growth of 5.23%, Tech Mahindra is ranked 5^th and given 1 point.

13) Client Metrics- Total Contract Value of New Deal Wins:

• In Q4FY21, TCS has acquired the most no. of deals worth $8.10 Billion and hence is provided with 5 points and first rank.
• Whereas Infosys has bagged a new deal worth $2.60 billion and ranks next to TCS.
• While, Wipro gets a deal of only $0.71 Billion in Q1 of FY22, lowest among the all concerned companies and hence provided with 1 point and last rank.

14) Client Metrics- Total Active Clients:

• As per March 2021, TCS has the highest no. of Active Clients i.e., over 2,500, and hence scores 5 points and first rank. Notably, all other IT companies are struggling to cross the level of 2,000 marks in terms of Active Clients.
• Infosys ranks 2^nd with 1,659* Active Clients while Tech Mahindra ranks 5^th with a 1,058 active client base.

15) Employee Metrics- Total Employee Base:

• TCS has an employee base of 5,09,058 which makes it the biggest company in this parameter among peers and therefore is provided with 5 points and first position. It has made a net addition of 20,409 new employees in Q1FY22.
• With an employee base of 2,67,953 Infosys gets the 2^nd position and 4 marks as well.
• Tech Mahindra gets the last position and 1 point. It has an employee base of 1,26,000.
• In terms of Net Addition as a % of Total Base, Wipro has acquired the highest employees this quarter i.e., 5.80% of its total customer base.

16) Employee Metrics- Gross Utilization (%):

• Gross Utilization is the amount that denotes the employee’s availability during the working hours of the company.
• Higher the Utilization percentage, higher will be beneficial for the firm as it improves the overall efficiency of the company.
• Here we can see that Tech Mahindra has the highest Gross Utilization of 88% and bags the first position.
• Infosys and Wipro come after that with a percentage of 82.3% and 77.7% respectively.

17) Employee Metrics- LTM Attrition (%):

• LTM Attrition means total no. of employee those who left the company in the Last Twelve Months.
• Overall, it measures the employee turnover rate in a company.
• Ideally, the lower the Attrition rate, the better it is considered for the company and vice-versa.
• In this criterion, TCS tops the list with the lowest LTM Attrition Rate of 8.6%.
• The worst condition of employee turnover is of Tech Mahindra with an attrition rate of 17% and hence market and ranked accordingly.

18) Free Cash Flow as % of PAT:

• Here Infosys is ranked 1^st with the highest FCF as % of PAT of 122%.
• Next to Infosys is TCS with FCF as % of PAT of 108% receive 4 marks. While Tech Mahindra has FCF as % of PAT of 94% which yields him 3^rd rank among peers.
• Wipro with the least FCF as % of PAT of 90% receives 1 point and fifth rank.

19) Cash Conversion Cycle (CCC):

• In the case of the IT Sector, CCC is quite lengthy in comparison to the FMCG sector. As the payments are received only after the delivery of services.
• Here, Wipro posts a great result with a CCC under the level of 10 days. The company has a CCC of 3.59 days, the lowest among the other competitors, and hence gains first position and full points.
• The worst performer in this context is HCL Tech, which has a CCC of 56.31 days and hence ranked 5^th and given 1 point only.

20) Final Score:

• Summing up the marks scored by the Top 5 IT Companies, Infosys and HCL Tech jointly shares the first position and has scored 74 points.
• Next to Infosys and HCL Tech are TCS and Tech Mahindra with 68 and 60 points respectively.
• Due to poor performance in the majority of parameters, Wipro gets the lowest score of 48 points.
• On account of healthy scores, HCL Tech, TCS, Infosys & Tech Mahindra appears to be strong IT Companies.