Top-5 IT Stocks Quantitative Analysis
Which is the best IT Large Cap Stock? Here is a Detailed Quantitative Analysis of the Top 5 IT Companies according to Market Capitalization, which is compared on 21 different parameters.
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 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.
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:
Top 5 IT Companies- PE Ratio
- PE of a company means 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 26.76, Wipro gets the first position and 5 points.
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, HCL Tech bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 15.16. TCS with the highest EV/EBITDA ratio of 23.93 receives the last position and one point only.
- Tech Mahindra with an EV/EBITDA ratio of 16.77 comes at 2nd position.
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 41.19% and hence obtains the 1st position as well as 5 points.
- HCL Tech with the lowest RoE of 18.30% receives the last rank.
4) 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 86.19% and hence it is rewarded with full points and first rank.
- FIIs and DIIs also hold around 82.52% 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 44.87% in the Company’s shareholding pattern and hence is given 1 point only.
5) Employee Cost as a % of Net Sales:
Top 5 Companies- 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. Employee Cost is a major component of the Operating Expenses in IT & will have a direct impact on Operating Margin.
- Lower Employee Cost % implies higher operating margins and vice-versa.
- With the lowest Employee Cost as a % of Net Sales Tech Mahindra 49.4% reserves a better chance of expanding margins. Hence, it is rewarded with 5 points.
- Whereas, Wipro has the highest Employee cost as a % of Net Sales of 56.5% and thereby scores 1 point only.
6) 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.
- Here, despite having higher employee cost, TCS efficiently post the OPM of 25% and secures 1st position.
- With the lowest OPM of 14.8%, Tech Mahindra has scored the last rank among the others.
- HCL Tech has registered the Operating Profit Margin of 19.1% in Q3FY22.
7) Constant Current Revenue Growth YoY%- Q3FY22:
Top 5 IT Stocks- Constant Current Revenue Growth YoY%
- While comparing the revenue of Top-5 IT companies based on their Constant Currency Revenue Growth YoY%, Wipro has registered the highest growth of 28.5% and has obtained 5 points and hence first rank.
- Next to Wipro is Infosys, which got the second position. Its Constant Currency Revenue Growth is 21.5% in the December quarter of FY22.
- HCL Tech has reported the least growth of 15% in Constant Currency Revenue Growth YoY% and hence is given only 1 point.
8) 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 19.34% and hence gets the full points. Here, Wipro got the 5th position, on account 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 14.75% 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.
9) Sales & Net Profit Growth: 3 Year CAGR:
Top 5 IT Companies- Sales & Net Profit- 3 Years CAGR
- On a 3-Years CAGR basis for Sales growth, HCL Tech outscores the other players with 14.23% 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, and Tech Mahindra are ranked 2nd, 3rd, and 4th 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 5th and given 1 point.
10) Client Metrics- Total Contract Value of New Deal Wins:
Top 5 IT Companies- Client Metrics: Value New of Deal Wins (Q3FY22)
- In Q3FY22, TCS has acquired the most no. of deals worth $7.60 Billion and hence is provided with 5 points and first rank.
- Whereas Infosys has bagged a new deal worth $2.50 billion and ranks next to TCS.
- While Wipro gets a deal of only $0.60 Billion in Q3 of FY22 gets 5th rank and 1 point.
11) Client Metrics- Total Active Clients:
Top 5 IT Companies- Client Metrics: Total Active Clients (December 2021)
- As per December 2021, TCS has the highest no. of Active Clients i.e., 2,651, 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 1,738 Active Clients while Tech Mahindra ranks 5th with a 1,191 active client base.
12) Employee Metrics – Revenue per Employee TTM
Top 5 IT Companies- Revenue per Employee TTM
- In the context of generating revenue per employee, HCL Tech with Revenue per Employee of Rs. 41.81 Lakh gets the first position and 5 points as well.
- Here, Tech Mahindra gets the 5th rank and 1 point only on account of reporting Rs. 29.1 Lakh Revenue per Employee on a TTM basis, the lowest among the peers.
13) 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 84% and bags the first position.
- Infosys and Wipro come after that with a percentage of 82.7% and 75.6% respectively.
- The Gross Utilization figure is not being reported by HCL Tech and TCS.
14) Employee Metrics- Net Addition in Q3FY22:
Top 5 IT Companies- Total Employee Base (December 2021)
- In December 2021, TCS added 28,238 employees to its human resource, the highest among other IT Companies and hence ranked first and given full points. TCS added 5.3% new employees as a % of the total base in Q3FY22.
- After TCS, the highest net addition of employees was done by Infosys of around 12,450 employees and 4.5% of its total base.
- Tech Mahindra recruited 3,874 employees in Q3FY22, ranked last, and given one point only.
15) Employee Metrics- LTM Attrition (%):
Top 5 IT Companies- Employee Metrics: LTM Attrition (December 2021)
- LTM Attrition means the total no. of employees 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 15.3%.
- The worst condition of employee turnover is of Infosys with an attrition rate of 25.5% and hence market and ranked accordingly.
16) Free Cash Flow as % of PAT: