Quantitative Analysis of Top 5 IT Stocks
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 expansion of IT Industry, its contribution toward GDP will increase from 7.5% to 10% by 2025.
Indian IT companies have become favorite offshore destination for IT business for companies across the world. Not only this, Indian IT sector serves clients across the globe in both On-shore Business as well as Off-Shore Business.
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 lot more to the revenue and growth of the IT companies.
Please note that we have done this analysis 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.
Detailed Review of Top 5 IT Companies
IT Sector Quantitative Analysis
Companies selected for Analysis:
We have selected the following five Large Cap IT companies for our Quantitative Analysis.
Market Capitalization of 5 IT Companies:
- TCS- Rs. 11.47 Lakh Cr.
- Infosys- Rs. 5.87 Lakh Cr.
- HCL Tech- Rs. 2.65 Lakh Cr.
- Wipro- Rs. 2.32 Lakh Cr.
- Tech Mahindra- Rs. 97,243 Cr.
Procedure of Analysis and its Interpretation
- These 5 Companies are analysed on following 19 parameters and ranked and scored accordingly. For example, company with higher PE ratio is provided lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has higher rank 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, we have added all the points together and companies are ranked accordingly.
Parameters of Quantitative Analysis:
1) PE Ratio:
- PE means how much investors should pay for the stock on the basis of its current earnings. Company with lower PE Ratio is considered to better and hence full points will be rewarded to that company.
- With the lowest PE Ratio of 20.1 HCL Tech gets the first position and 5 points. And TCS with highest PE of 36.7 among peers is awarded with 1 point only.
- EV/EBITDA 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 value below 10 is considered as healthy.
- Here also, HCL Tech ranks the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 6.63. TCS with the highest EV/EBITDA ratio of 14.43 receives the last position and one point only.
3) Return on Equity (ROE):
- RoE signifies how well the company generates the return on shareholders’ investment. Company with higher RoE is considered good.
- In this parameter, TCS outperforms other peers by scoring the highest ROE of 37.60% and hence obtains the 1st position as well as 5 points.
- Wipro with the lowest RoE of 17.55% receives the last rank.
4) Debt-to-Equity Ratio:
- Debt-to-Equity ratio is a leverage ratio which measures the debt of company against its total shareholder’s equity.
- Accordingly, lesser the debt, better it is for the company and vice-versa.
- Generally, IT Companies are Cash rich company, they don’t have much debt. But there are exceptions to this case.
- TCS and Infosys are debt-free companies and hence both are rewarded with full points and jointly shares the first position.
- Wipro has the highest D/E ratio of 0.14 ad hence given 5th rank. Likely, Tech Mahindra and HCL Tech has the D/E ratio of 0.12 and 0.10 respectively.
5) Interest Coverage Ratio:
- 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 Interest Coverage Ratio of 130.5, highest among peers, gets the first rank.
- Due to low Interest Coverage Ratio of 17.7, Wipro is ranked and scored accordingly.
6) Pledged %:
- Only TCS have pledged their share of 2.94% and hence the company is given 5th rank and 1 point as per rule.
- Any other companies in the list have not pledged their share and hence are rewarded with full points and first rank.
7) Institutional Holding (FII + DII):
- Institutional Investors (FII + DII) has the highest stake in Infosys, collectively of 56% and hence Infosys is rewarded with full points and first rank.
- FIIs and DIIs also hold more than 50% stake in Tech Mahindra and hence it secures the 2nd position in this criterion and scores 4 marks.
- Wipro has the lowest stake of institutional investors in Company’s shareholding pattern and hence is given 1 point only.
8) Employee Cost as a % of Net Sales
- IT sector employs human capital resources at a higher scale. Thereby, Employee Cost becomes crucial part of 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 Wipro i.e., 48.9% reserves better chance of expanding margins. Hence, HCL Tech is rewarded with 5 points.
- Whereas, TCS has the highest Employee cost as a % of Net Sales of 55.8% and thereby scores 1 point only.
9) Operating Profit Margin (%):
- Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
- Due to lower employee cost, HCL Tech has the highest Operating Profit Margin (%) of 29.14% and hence rewarded with first position and full points.
- Here, despite having higher employee cost, TCS efficiently post the OPM of 29.06% and secures 2nd position.
- With the lowest OPM of 19.65%, Tech Mahindra is scores last rank among the others.
10) Sales and Net Profit Growth- 5 Year CAGR:
- In terms of Sales Growth, HCL Tech post the highest figure of 14% and hence gets the full points. Here, Wipro got the 5th position, on accounts of its lowest sales growth on 5 years CAGR basis.
- TCS has registered the highest Profit After Tax (PAT) growth on 5 years CAGR basis of 10.3% and hence is rewarded with first rank. Here again, Wipro presents its laggardness and delivers mere 2.3% PAT and therefore scored and ranked accordingly.
11)Sales & Net Profit Growth: 3 Year CAGR:
- On 3-Years CAGR basis, HCL Tech again outscores the other players with 14.1% Sales Growth and receives the first position and 5 points as well. Wipro continues to deliver poor performance and post Sales Growth of 3.3% and hence is rewarded last rank.
- With regard to Sales Growth on 3-years CAGR basis, TCS, Infosys & Tech Mahindra are ranked 2nd, 3rd and 4th respectively & their sales growth accordingly are 10%, 9.9% and 8.2%.
- While, Tech Mahindra ranks first with the highest PAT growth of 12.8% on 3-Years CAGR basis. With the lowest PAT growth of 4.6%, Wipro is ranked 5th and given 1 point.
12) Client Metrics- Total Contract Value of New Deal Wins:
- In Q3FY21, Infosys has acquired the most no. of deals worth $7.13 Billion and hence is provided with 5 points and first rank.
- Whereas TCS has bagged new deal worth Rs. $6.80 billion, and ranks next to Infosys.
- While, HCL Tech gets deal of only $0.09 Billion in last quarter of FY21, lowest among the all concerned companies and hence provided with 1 point and last rank.
13) Client Metrics- Total Active Clients:
- As per Dec. 2020, TCS have the highest no. of Active Clients i.e., 2,500 and hence scores 5 points and first rank. Notably, all other IT companies are struggling to cross the level of 2,000 mark in terms of Active Clients.
- Infosys ranks 2nd with 1,562 Active Clients while Tech Mahindra ranks 5th with 997 active client bases.
14) Employee Metrics- Total Employee Base:
- TCS has an employee base of 4,69,261 which makes it the biggest company in this parameter among peers and therefore is provided with 5 points and first position.
- With employee base of 2,49,315, Infosys gets the 2nd position and 4 marks as well.
- Tech Mahindra with gets the last position and 1 point. It has an Eemployee base of 1,21,901.
15) 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, lower the Attrition rate, better it is considered for the company and vice-versa.
- In this criterion, TCS tops the list with the lowest LTM Attrition Rate of 7.6%.
- The worst condition of employee turnover is of Tech Mahindra with attrition rate of 12% and hence market and ranked accordingly.
16) Free Cash Flow:
- Here again, TCS is ranked 1st with the highest FCF/share of 74.83.
- Next to TCS, Tech Mahindra with FCF/share of 45.68 receives 4 marks. While HCL Tech has FCF/share of 40.70 which yields him 3rd rank among peers.
- Wipro with the least FCF/share of 12.46 receives 1 point and fifth rank.
17) Cash Conversion Cycle (CCC):
- In case of IT Sector, CCC is a quite lengthy in comparison to FMCG sector. As the payments are received only after the delivery of services.
- Here, Wipro post a great result with a CCC under the level of 10 days. Company has CCC of 1.43 days, lowest among the other competitors and hence gains first position and full points.
- The worst performer in this context is HCL Tech, which has CCC of 56.19 days and hence ranked 5th and given 1 point only.
18) Final Score:
- Summing up the marks scored by the Top 5 IT Companies, HCL Tech is the front runner thereby conquers the first position in our analysis. HCL Tech score 67, highest among all 5 companies.
- TCS and Infosys are also close to the scores of HCL Tech. Scores of both the companies are 66 & 65 and hence ranked 2nd and 3rd respectively.
- Due to poor performance in majority of parameters, Wipro gets the lowest score of 42 points.
- On account of healthy scores, HCL Tech, TCS & Infosys appears to be strong IT Companies.