Which is the best IT Stock? Here is the Quantitative Analysis of Top-5 IT companies based on their Q4FY21 performances.
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 the 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.
Market Capitalization of 5 IT Stocks:
- TCS- Rs. 11.63 Lakh Cr.
- Infosys- Rs. 5.70 Lakh Cr.
- Wipro- Rs. 2.88 Lakh Cr.
- HCL Tech- Rs. 2.48 Lakh Cr.
- Tech Mahindra- Rs. 69,026 Cr.
The procedure of Analysis and its Interpretation
- These 5 Companies are analyzed on the following 20 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:
Top 5 IT Companies- PE
- 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 21.7 Tech Mahindra gets the first position and 5 points. And TCS with the highest PE of 35.9 among peers is awarded 1 point only.
Top 5 IT Companies- 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, Tech Mahindra bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 15.05. TCS with the highest EV/EBITDA ratio of 25.39 receives the last position and one point only.
3) Return on Equity (ROE):
Top 5 IT Companies- 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 1st position as well as 5 points.
- Tech Mahindra with the lowest RoE of 17.71% receives the last rank.
4) Debt-to-Equity Ratio:
Top 5 IT Companies- D/E Ratio
- The debt-to-equity ratio is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
- Accordingly, lesser is the debt, 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 0.14 and hence given 5th rank. Likely, Tech Mahindra and HCL Tech have the D/E ratio of 0.12 and 0.10 respectively.
5) Interest Coverage Ratio:
Top 5 IT Companies- 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 low-Interest Coverage Ratio of 17.7, Wipro is ranked and scored accordingly.
6) Pledged %:
Top 5 IT Companies- Pledged %
- Only TCS have pledged their share of 0.47% 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):
Top 5 Companies- Institutional Holdings (FII + DII)
- Institutional Investors (FII + DII) as a % of Free Float has the highest stake in HCL Tech, collectively of 87.5% and hence Infosys is rewarded with full points and first rank.
- FIIs and DIIs also hold more than 84% stake in TCS and hence it secures the 2nd position in this criterion and scores 4 marks.
- Wipro has the lowest stake of institutional investors of 57% in the Company’s shareholding pattern and hence is given 1 point only.
8) Employee Cost as a % of Net Sales
Top 5 Companies- Employee Cost as % 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., 48.3% reserves better chance of expanding margins. Hence, it is rewarded with 5 points.
- Whereas, HCL Tech has the highest Employee cost as a % of Net Sales of 55.3% and thereby scores 1 point only.
9) Operating Profit Margin (%):
Top 5 IT Companies- Operating Profit Margin (%)
- Operating Profit Margin can be calculated by dividing Operating Profit by Total Revenue. It is sometimes also called EBIT (Earnings before Interest and Tax) Margin.
- Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
- Due to higher employee cost, HCL Tech has the lower Operating Profit Margin (%) of 16.6% and hence stands at 4th position. 6.3% Erosion in EBIT Margin due to Steep Rise in Employee Cost (One-time Bonus Impact in Q4). Without Considering Bonus Impact, EBIT Margin would have been at 20.4%
- Here, despite having higher employee cost, TCS efficiently post the OPM of 26.8% and secures 1st position.
- With the lowest OPM of 16%, Tech Mahindra has scored the last rank among the others.
10) Sales and Net Profit Growth- 5 Year CAGR:
Top 5 IT Companies- Sales & Net Profit Growth- 5 Years CAGR
- In terms of Sales Growth, HCL Tech posts 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.
- Tech Mahindra has registered the highest Profit After Tax (PAT) growth on 5 years CAGR basis of 8.95% and hence is rewarded with the first rank. Here again, Wipro presents its laggardness and delivers a mere 2.34% PAT and therefore scored and ranked accordingly.
11) Sales & Net Profit Growth: 3 Year CAGR:
Top 5 IT Companies- Sales & Net Profit- 3 Years 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 3.31% and hence is rewarded the last rank.
- Concerning Sales Growth on a 3-years CAGR basis, Infosys, TCS & 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 12.76% on a 3-Years CAGR basis. With the lowest PAT growth of 4.61%, Wipro is ranked 5th and given 1 point.
12) Client Metrics- Total Contract Value of New Deal Wins:
Top 5 IT Companies- Client Metrics: Value New of Deal Wins (Q4FY21)
- In Q4FY21, TCS has acquired the most no. of deals worth $9.20 Billion and hence is provided with 5 points and first rank.
- Whereas HCL has bagged a new deal worth Rs. $3.10 billion, and ranks next to TCS.
- While, Tech Mahindra gets a deal of only $1.04 Billion in Q4 of FY21, lowest among the all concerned companies and hence provided with 1 point and last rank.
13) Client Metrics- Total Active Clients:
Top 5 IT Companies- Client Metrics: Total Active Clients (March 2021)
- 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 2nd with 1,626 Active Clients while Tech Mahindra ranks 5th with a 1,007 active client base.
14) Employee Metrics- Total Employee Base:
Top 5 IT Companies- Total Employee Base (March 2021)
- TCS has an employee base of 4,88,649 which makes it the biggest company in this parameter among peers and therefore is provided with 5 points and first position.
- With an employee base of 2,59,619 Infosys gets the 2nd position and 4 marks as well.
- Tech Mahindra gets the last position and 1 point. It has an employee base of 1,21,054.
15) Employee Metrics- Gross Utilization (%):
Top 5 IT Companies- 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 87.4% and bags the first position.
- Infosys and Wipro come after that with a percentage of 82.2% and 76.7% respectively.
16) Employee Metrics- LTM Attrition (%):
Top 5 IT Companies- Employee Metrics: LTM Attrition (March 2021)
- 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 7.2%.
- The worst condition of employee turnover is of Infosys with an attrition rate of 15.2% and hence market and ranked accordingly.
17) Free Cash Flow as % of PAT: