TCS vs Wipro: Which Stock is Better?

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TCS vs Wipro: Which Stock is Better?

Jan 21, 2022

TCS vs Wipro: Which Stock is Better?

The Indian information technology (IT) sector accounts for almost 8% of the gross domestic product (GDP) in India. It's also one of the fastest-growing sectors in India.

India has the largest market share (55%) in IT services in the world. The industry is expected to reach US$ 100 bn in size by 2025.

India is home to many global IT players and is a desirable destination for outsourcing services. This is due to the availability of a highly-skilled workforce at competitive prices.

Two well know players in this industry are Tata Consultancy Services (TCS) and Wipro.

In this article, we compare both the companies based on their financials, operations and growth prospects.

Business Overview

TCS is the flagship company of the Tata Group. It has been offering IT services, business solutions and consultancy services for the past 50 years.

It's the biggest IT company in India and has a diversified product portfolio.

The company serves several industries including financial services, retail, communication, manufacturing, and life sciences and healthcare.

Wipro is one of the leading global IT and business process services companies in the country.

The company serves clients spread across six continents. Its operations are broadly classified into IT services, IT products, and India State Run Enterprise (ISRE) segments.

It offers various advisory and consulting services along with software products to many industries including banking, financial services, healthcare, energy, natural resources, and manufacturing.

TCS vs Wipro Business Overview

  TCS Wipro
Services Analytics and Insights
Blockchain
Cognitive Business Operations
Cyber Security
Enterprise Applications
Quality Engineering
Automation and AI
Cloud
Consulting
IOT & Digital Engineering
TCS Interactive
Sustainability Services
Data, Analytics & AI
Applications
Consulting
Infrastructure Services
Digital Operations and Platforms
Blockchain
Cyber Security & Enterprise risk
DevOps
Enterprise Ops Transformation
Product Lifecycle Management
Software as a service
Key Business Verticals Financial services
Retail
Communication
Manufacturing
Life science and healthcare
Banking, Financial Services and Insurance
Healthcare
Consumer business
Energy
Natural Resources and Utilities
Manufacturing
Technology
Communications
Competitive Advantage Market leader in IT services space
Outsourcing
Diversified client base
Global IT player
Diversified precense across sectors
High repeat business
Data Source: Company Website

Both companies offer IT services to similar industries. However, Wipro has a more diversified presence than TCS.

TCS on the other hand has a diversified client base and is a market leader in providing IT services.

Revenue growth

In the last five years (2017-2021), the revenue for TCS and Wipro has grown at a CAGR of 6.5% and 2.1%, respectively.

TCS is leading in terms of revenue growth.

The revenue growth for the company was driven by the life science and healthcare industries. On the other hand, the revenue growth of Wipro was led by its finance, consumer business, and healthcare business divisions.

TCS vs Wipro Revenue Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Revenue (in m)          
TCS 1,221,870 1,267,460 1,507,740 1,615,410 1,673,110
Wipro 580,710 570,465 616,327 638,626 644,725
Revenue Growth (%)          
TCS   3.73% 18.96% 7.14% 3.57%
Wipro   -1.76% 8.04% 3.62% 0.96%
Source: Equitymaster

Cost-cutting initiatives led to higher margins

Over the years, both TCS and Wipro have undertaken various initiatives to reduce costs which helped in maintaining good margins.

The five-year average operating profit margin (OPM) for TCS stands higher at 27%. Wipro's operating profit margin comes in much lower at 20.6%.

TCS vs Wipro Profit Margins (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Operating Profit Margin (%)          
TCS 27.4% 26.4% 27.0% 26.8% 27.6%
Wipro 20.4% 19.0% 19.7% 20.2% 23.6%
Net Profit Margin (%)          
TCS 22.3% 21.0% 21.5% 20.7% 19.8%
Wipro 15.4% 14.7% 15.3% 16.0% 17.5%
Source: Equitymaster

With respect to net profit margins, TCS is leading again with an average five-year net profit margin of 21.1%, against 15.8% of Wipro.

Employee metrics

In the IT sector, employees are invaluable assets.

Companies have to continuously invest in their employees to ensure their growth along with the company's growth. A dissatisfied employee's productivity is usually low. That leads to attrition.

When assessing the human capital of a company, there are two employee metrics to look at - revenue per employee and attrition.

In the financial year 2021, the revenue per employee for TCS and Wipro stood at US$ 45,400 and US$ 41,000 respectively.

Both TCS and Wipro saw degrowth in revenue per employee by 7.5% and 6.5% respectively during the year.

TCS vs Wipro Revenue per Employee (in US$ '000)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
TCS 45.4 48.3 49.3 49.1 45.4
Wipro 46.6 49.2 46.6 43.9 41
Data Source: Annual Report

TCS employs 400,000 employees across 150 nationalities from over 40 countries, which is more than double the number of employees at Wipro.

Yet it has managed to keep its attrition rate below Wipro's mainly due to promotions and internal opportunities.

The attrition rate for TCS stood at 7.2% during the financial year 2021 compared to that of Wipro which stood at 12.1%.

However, this went up to 15.3% for TCS and 22.7% for Wipro in the December 2021 quarter due to increased demand for IT and supply tightness in niche skill areas.

TCS vs Wipro Attrition Rate (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
TCS 10.5% 11.0% 11.3% 12.1% 7.2%
Wipro 16.3% 16.8% 17.6% 14.7% 12.1%
Data Source: Annual Report

Shareholder payout through buybacks and dividends

TCS has bought back shares worth Rs 480 bn from the market in three different transactions in the last five years.

It recently announced another buyback of Rs 180 bn, the biggest buyback in the last four years after the company hit the US$ 25 bn mark in revenue for the calendar year 2021.

Wipro, on the other hand, has bought back shares worth Rs 335 bn from the market in four different transactions in the last five years.

The reason stated for the buybacks is to return excess cash to the shareholders.

A company generally carries out a buyback if it feels the share price is undervalued. When it buys back its shares, the earnings per share (EPS) rises. As a result, the price to earnings ratio (PE) falls, making it an attractive investment.

A buyback is also a preferred route if the company sees good growth in the near future and wants to retain profits instead of distributing to its shareholders.

If it plans to distribute its profits to its shareholders, it does so in the form of dividends. Dividends can be in the form of cash or stock.

The five-year average dividend yield and dividend payout for TCS is 2% and 47.1% respectively.

For Wipro, the numbers stand at 0.4% and 5.8% respectively.

TCS is leading in this category as it pays higher dividends to its shareholders than Wipro.

TCS vs Wipro Dividend Payout Ratio (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
TCS 35.1% 37.0% 35.7% 84.4% 43.2%
Wipro 5.7% 5.7% 6.7% 5.8% 5.0%
Source: Equitymaster

Return on Equity

Return on equity (ROE) measures how efficiently the company is using its equity capital to generate profits.

The average ROE for TCS and Wipro in the last five years stands at 34.5% and 17.4%, respectively. TCS has been more effective in terms of generating returns for its shareholders than Wipro.

TCS vs Wipro Return on Equity (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
TCS 30.6% 30.4% 35.3% 38.6% 37.7%
Wipro 16.6% 16.8% 16.1% 17.7% 19.9%
Source: Equitymaster

High valuations

The Price to Earnings ratio (P/E) and Price to Book Value (P/BV) are valuation ratios that help in determining whether the company's share price is overvalued or undervalued.

The P/E ratio indicates how much an investor is willing to pay for one rupee of earnings. A high P/E ratio indicates the shares are trading at a premium.

The P/BV ratio measures the market valuation of a company to its book value. A high P/BV ratio indicates the share is overvalued.

The P/E and P/BV ratios of TCS stood at 28.4 and 10.7, respectively, for the financial year 2021. For the last five years, the average stands at 24.1 and 8.4.

For Wipro, the P/E and P/BV ratios stood at 16.2 and 3.2, respectively. The five-year average is 15.7 and 2.7.

TCS is trading at a premium to Wipro in terms of P/E and P/B. Also, both the shares seem slightly overpriced when compared to their five-year averages.

TCS vs Wipro Valuation Ratios (2020-2021)

  P/BV Ratio 5 year average P/BV P/E Ratio 5 year average P/E
TCS 10.7 8.4 28.4 24.1
Wipro 3.2 2.7 16.2 15.7
Source: Equitymaster

Key acquisitions

Both TCS and Wipro have been acquiring quite a few companies to strengthen their client services across verticals.

The most notable acquisitions of TCS in the last five years are Pramerica, BridgePoint, and W12 Studios.

Wipro too has spent a lot on acquisitions.

In the last five years, it has acquired Designit, Cooper, Gallagher Financial Systems, Opus Capital Markets Consultants, LLC, HPS, and ProMAX Systems to develop Wipro HOLMES.

In the financial year 2021, it completed its largest acquisition ever. It acquired CAPCO for US$1.45 bn to strengthen its presence banking and financial services sector.

It also announced six acquisitions to strengthen its domestic presence.

Sustainability efforts

Both IT companies are doing their bit for the environment by reducing their energy consumption and using more renewable sources of energy.

TCS is adding more green buildings to its real estate portfolio and reducing its IT power usage to reduce its carbon footprint by leveraging technology.

The company plans to achieve net-zero emissions by 2030. It also aims to reduce its carbon emissions by 70% by 2025.

Wipro, on the other hand, is also reducing its overall energy consumption substantially every year across all its office spaces and data centres.

The company plans to achieve net-zero emissions by 2040 with an absolute emission reduction of 55% by 2030.

Impact of Covid-19 on business

The profitability of both TCS and Wipro was impacted in the first quarter of the financial year 2021 due to the pandemic.

However, from the second quarter onwards, business picked up.

As the pandemic has forced companies across various industries to invest in digital transformation to support their business, the demand for IT services grew rapidly.

As a result, both companies saw high revenue growth.

Both companies also saw unexpected costs due to the pandemic. However, this was partially offset by lower travel expenses and cost-cutting initiatives.

Future prospects

The management of TCS has said the pandemic posed as an opportunity for the company as its clients have rushed to adopt cloud platforms at a much faster pace than it anticipated.

This can be seen in the number of deals it secured.

In the March 2021 quarter, TCS secured a total of 30 deals, making it a leader among its peers. In the December 2021 quarter, the company's order book stood at US$7.6 bn, an 11% year on year (YoY) increase.

It has also added more than 240 clients in different revenue bands in the financial year 2022 so far.

The management of Wipro believes that the growth in the IT sector will be led by digital, cloud, engineering, cyber security, 5G, AI, robotics, and blockchain.

Wipro has been offering services around these next-generation technologies. It also has an established client base across various industries.

In the financial year 2021, the company's order book grew 33% in the second half of the year. It added 24 new clients with a total contract value of US$2.6 bn.

It also closed a mega-deal that is expected to generate US$1 bn in revenue.

Both the companies are seeing robust demand for their services since the last quarter of the financial year 2021.

Hence one can expect these companies to maintain revenue growth and margins despite the emergence of new Covid-19 variants.

Equitymaster's View

We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster to ask her view on both companies. Here's what she had to say...

  • While TCS' financial performance may be slightly better than Wipro's in the near term, when it comes to their financial performance in the longer term, the real gamechangers will be the companies' investments in new technology innovations and startups.

    These investments could give the fortunes of one of these companies a massive edge over the other, in next few decades.

Which is better?

In terms of revenue growth and profit margins, TCS has a better edge than Wipro.

TCS is also leading in terms of the return it earns for shareholders and dividends.

Despite having a huge employee base, and supply-side tightness, TCS is doing a better job at retaining its talent than Wipro.

In terms of deals secured, TCS is leading in the entire IT industry. It has secured more than 30 deals in the March quarter of 2021 and added more than 240 clients in the first nine months of the financial year 2022.

However, in terms of valuation, TCS is overpriced when compared to Wipro. The gap in the valuations is pretty wide making Wipro look under-priced when compared to TCS.

Before you consider investing in any stock, check the fundaments and valuations of both companies. It plays an important role in deciding which is suitable for investment.

Still confused which is better?

Use our feature-rich comparison tool which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

TCS vs Wipro

You can also compare both the companies with their peers.

TCS vs Infosys

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For a detailed analysis, check out the TCS factsheet and Wipro factsheet.

You can also check out the latest quarterly results for TCS and Wipro.

Since stocks from the IT sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top IT sector companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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