HCL Tech vs L&T Infotech: Which IT Stock is Better?

The proliferation of digital technologies due to the pandemic has stimulated growth in an already growing IT (Information Technology) industry.

Every sector from healthcare to education, transport to financial services is being 'digitised' via modern technology.

Digitising the core of any business not only boosts customer satisfaction but also enhances efficiency, effectively lowering costs.

As technology transforms businesses around the globe, enterprises will increase their technology spending. This puts India in a sweet spot.

In today's article, we compare two players from the IT industry that are riding this digitisation trend - L&T Infotech and HCL Tech.

Background

HCL Tech

HCL Tech is India's fourth-largest IT company. It operates in over 52 countries.

the company's key focus areas are BFSI, manufacturing, cloud computing, Life Sciences and Healthcare, and Media and entertainment.

L&T Infotech

Founded in 1997 as a subsidiary of Larsen & Toubro Limited, L&T Infotech is a global technology consulting and digital solutions company with operations in over 33 countries.

Like HCL Tech, L&T Infotech caters to similar industries such as BFSI (banking financial service and insurance), manufacturing, retail etc.

Revenue growth

An important indicator to analyse the potential of a business is the growth in revenue.

Despite being much bigger than L&T InfoTech, HCL Tech has clocked in higher revenue growth over the last five years. Its 5-year-CAGR stands at 19.3% whereas, L&T InfoTech's stands at 16.2%.

HCL Tech vs L&T Infotech Revenue Growth (2016-2020)

	2016	2017	2018	2019	2020	2021
Revenue (Rs m)
HCL Tech	311,359	475,680	505,690	604,270	706,760	753,790
L&T Infotech	58,464	65,009	73,065	94,458	108,786	123,698
Growth YOY%
HCL Tech		52.8%	6.3%	19.5%	17.0%	6.7%
L&T Infotech		11.2%	12.4%	29.3%	15.2%	13.7%

Source: Equitymaster

Apart from forging innovations in-house, HCL Tech has been ahead of the technology curve by investing in partnerships.

The company has adapted themselves every step of the way. The latest example is the Internet of Things, cloud computing, and cybersecurity. The key growth driver has been these segments, which have increasingly become a big source of revenue for IT companies.

L&T Infotech's revenue growth also comes from these segments, referred to as 'digital' revenue.

Digital revenue stands for income from new-age businesses such as cloud computing, Internet of Things (IoT), cybersecurity, products, and platform services that leverage these technologies. However, this definition differs from one company to another.

Within this, a large part of the revenue comes from the adoption of newer technologies in the BFSI (21.9%) and manufacturing (17.9%) verticals being serviced by HCL Tech.

The same holds true for L&T Infotech where BFSI account for more than 45% of the revenues.

HCL Tech vs L&T Infotech Revenue Mix by Industry

L&T Infotech		HCL Tech
BFSI	45.20%	BFSI	21.90%
Manufacturing	16.90%	Manufacturing	17.90%
Energy and Utilities	9.10%	Technology and Services	17.40%
Retail & Consumer packaged goods and Pharmaceuticals	10.80%	Lifesciences and Healthcare	13.90%
Hi-tech Media and Entertainment	11.80%	Public Services	10.80%
Others	6.20%	Retail and Consumer packaged goods	10.20%
		Hi-tech Media and Entertainment	7.90%

Data Source: Company Annual Reports

Both, HCL Tech and L&T Infotech enjoy an impressive client roster. However, L&T Infotech is largely dependent on one segment, the BFSI, whereas HCL Tech has a much more diversified source of income.

Profitability

A company's profitability is best reflected in its operating margin, which is the operating profit (earnings before interest depreciation tax - EBIDTA) divided by earnings.

Simply put, it measures how much profit a company makes on one rupee of sales from its core operations (before interest and depreciation).

A higher operating margin is usually a result of two things - either the company is generating higher revenues or is keeping a tight lid on its costs.

HCL Tech vs L&T Infotech Profit Margins (2016-2020)

	2017	2018	2019	2020	2021
Operating Profit %
HCL Tech	21.8%	22.2%	23.0%	24.5%	26.6%
L&T Infotech	18.9%	16.2%	19.9%	18.6%	21.9%

Source: Equitymaster

HCL Tech's operating margins have been consistently higher and have grown at a faster rate than L&T Infotech's.

Employee Attrition Rate

The biggest cost head for an IT company is its manpower. The people who create and manage the software and consulting services.

Therefore, a good way to judge a company's profitability is to analyse how much revenue a single employee generates.

HCL Tech vs L&T Infotech Revenue Per Employee and Attrition Level (2017-2020)

	2017	2018	2019	2020	2021
Revenue per employee
HCL Tech	4,101,644	4,211,241	4,379,879	4,698,484	4,460,903
L&T Infotech	3,092,280	3,026,845	3,353,261	3,460,445	3,436,915
Attrition Level
HCL Tech	NA	15.5%	17.7%	16.3%	9.9%
L&T Infotech	18.4%	18.4%	17.5%	16.5%	12.3%

Data Source: Company Annual Report

HCL Tech's revenue per employee is 30% higher than L&T Infotech's, indicating the company operates at a higher level of efficiency.

The rate of attrition is the rate at which an employee leaves a company to join another.

A high attrition rate indicates that more employees are leaving the organisation. An important metric, it indicates how a company manages its most important cost-head.

Barring the one-time effect of the pandemic, in 2021, both companies have reported a similar rate of attrition.

Dividend

Dividend yield measures the additional income an investor can make, other than the appreciation in the value of the share. The higher the ratio, the better the return for the shareholders.

Most mature IT companies generate a lot of cash as the capital expenditure to grow is minimal. And so they tend to be dividend paymasters.

The five-year average dividend yield is not very different for both companies with L&T Infotech's being slightly higher at 1.9% compared to HCL Tech's at 1.6%. However, both are higher than the current industry average of 1.47%.

Return on Equity (RoE)

Return on equity is one of the most meaningful indicators of a company's profitability and efficiency.

An excellent tool for analysing the returns of a company, it tells you the amount of money a company can generate on the shareholder capital invested (shareholders equity).

HCL Tech vs L&T Infotech Return on Equity (2017-2021)

	2017	2018	2019	2020	2021
Return on equity
HCL Tech	26.1%	24.0%	24.5%	21.6%	18.6%
L&T Infotech	32.4%	29.4%	31.4%	28.5%	26.7%

Source: Equitymaster

The 5-year average for L&T Infotech stands at 29.7%, which is higher than HCL Tech's which stands at 23%. However, the number for L&T Infotech seems to be averaging down.

A higher number indicates that L&T Infotech is generating more returns by employing its capital efficiently.

Valuation

The most common and effective ratio for comparative analysis and valuation is the price to earnings (PE) ratio. The PE ratio uses the company's earnings to find the value a shareholder is willing to pay for one rupee of earnings.

The PE ratio for HCL Tech currently stands at 29.1. This is much higher than its 15-years average of 16.3 and the 5-year average of 15.8. This indicates the stock is overvalued. However, it is trading lower than the current industry P of 33.6.

The PE ratio for L&T Infotech is 50.4, which is much higher than its 5-year average of 21.2 and the current industry PE of 33.6. This indicates the stock is overvalued.

Impact of Covid-19 on business

As the pandemic ravaged the global economy, L&T Infotech and HCL Tech felt the heat as well.

Not only did it affect revenue growth, but it also dampened profitability.

As work environment safety and enabling work from home became a priority, the company had to bear a steep rise in unanticipated costs in addition to termination and postponement of projects.

However, the IT sector was also one of the top beneficiaries in the aftermath of the pandemic. As digitization became the necessity of the hour, the IT business expanded.

Both, HCL Tech and L&T Infotech reported higher order bookings in the coming quarters, culminating in enhanced profitability.

Bright Prospects

The pandemic has accelerated the switch to digitisation. From Zoom calls to e-consultations with doctors, there has been a massive shift to technology and it is not temporary.

Companies want to adapt and digitise their core faster than before to survive and thrive in this emerging new economic order. This technological transformation in entire business models will propel technology spending to astronomical highs.

Furthermore, this will drive up data usage, triggering further demand for data storage and protection.

It calls for increased investments in digital, analytics, cloud, internet of things (IoT), cybersecurity and other emerging technologies. These services are expected to grow exponentially. Cloud services alone are expected to become a US$ 300 bn market.

Considering India has developed into an IT hub over the past decade, this can be a great opportunity for established players.

HCL Tech or L&T Infotech: Which is better?

With a strong outlook and solid fundamentals in place, the long-term view of HCL Tech and L&T infotech seems bright.

HCL Tech has higher revenue growth and operating margins, which make it a stronger and more efficient player in comparison to L&T Infotech.

The company's large scale of operations and established presence across geographies, also give it a leg-up resulting in higher efficiency.

However, L&T Infotech generates a higher ROE, giving investors more bang for their buck.

From a valuation perspective, the shares of L&T Infotech are trading at a premium to the shares of HCL Tech.

Still wondering 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!

You can also compare companies with their peers.

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For a more detailed analysis of the mentioned IT, check out the HCL Tech factsheet and L&T Infotech factsheet.

You can also check out the latest quarterly results for HCL Tech and L&T Infotech.