TCS vs HCL Tech: Which IT Stock is Better?

The pandemic has forced a whole new set of changes in our life.

Working from home, buying groceries online, and online doctor consultations have become the new normal.

The same is the case for businesses of all kinds. The way they operate and run has also changed suddenly to digital. Digital transformation, which was considered an add-on, has become a necessity. Businesses that could adapt to this technology survived, the rest didn't.

One industry making digital transformations a reality for so many businesses is the global information technology (IT) industry.

Through the technological breakthroughs of this industry, the entire economy could recover swiftly from the consequences of lockdown.

In this important industry, many global players like Microsoft and IBM have contributed significantly to the industry's growth.

However, Indian players like Tata Consultancy Services (TCS), Infosys, and HCL Technologies give tough competition to their global peers.

In this article, we compare TCS and HCL Technologies to understand who has better financials and growth prospects.

Business overview

TCS, the flagship IT company of the Tata Group, is one of the leading IT services companies in the country.

The company offers a host of services, including IT consulting, artificial intelligence (AI), blockchain, cyber security, enterprise applications, and cloud computing.

It has a diversified product portfolio through which it serves many sectors such as financial services, retail, communication and manufacturing.

TCS offers its services to a diversified client base spread globally across 46 countries.

HCL Technologies, on the other hand, is one of the fastest-growing IT services companies in the world.

The company offers IT and business services, engineering and R&D services and various products and platforms to its diversified client base spread across 46 countries.

It has laid down a blueprint for the growth of its digital business and divided its services into three modes to help its clients in their digital transformation.

Business Overview TCS and HCL

	TCS	HCL
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	Engineering and R&D Services Product engineering Platform engineering Operational technology services NextGen engineering IT & Business Services Hybrid cloud services Cyber security Data and analytics IoT Products and Platforms HCL Software Industry Softwares Actian Avalanche Hybrid Cloud Data Platform Banking Transformation Platform
Key Business Verticals	Financial services Retail Communication Manufacturing Life science and healthcare	Aerospace and defence Automotive Banking Financial markets Consumer goods Chemical and process industry Energy and utilities Healthcare Hi-Tech Industrial manufacturing Media and entertainment Oil and gas Public Sector Telecom Retail Travel, transport, logistics and hospitality
Competitive Advantage	Market leader in IT services space Outsourcing Diversified client base	Global leader in engineering and R&D services Fastest growing IT company in the world Diversified presence across vertical Strong market position
Challenges	Intense competition Volatility in forex rates	Intense competition Volatility in forex rates

Data Source: Company Website

TCS is a market leader in IT services in India. In contrast, HCL Technologies is the third largest IT company in India.

While both the companies offer similar services, HCL Technologies has a more diversified service offering and diversified presence across business verticals than TCS.

Revenue and revenue growth

Revenue and revenue growth are two important indicators of a business's existence.

Revenue or top line is the total income generated by the company by selling its products and services.

On the other hand, revenue growth is the percentage increase in revenue over a period of time.

TCS is the largest IT company in India in terms of revenue. Its revenue is almost 2.37 times that of HCL technologies.

HCL Technologies, on the other hand, is the third-largest IT company in India in terms of revenue.

HCL Technologies' revenue has grown at a compound annual growth rate (CAGR) of 9.4% in the last five years. TCS's revenue, on the other hand, has grown at a CAGR of 6.4% during the same period.

TCS vs HCL 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
HCL	486,460	517,930	613,800	712,950	763,290
Revenue Growth (%)
TCS		3.73%	18.96%	7.14%	3.57%
HCL		6.47%	18.51%	16.15%	7.06%

Source: Equitymaster

The revenue growth for TCS was driven by digital services in the life science and healthcare industries.

For HCL Technologies, the revenue growth was led by IT and business services and engineering and R&D services across business verticals.

Both companies are expecting double-digit revenue growth in the financial year 2022, driven by strong demand for IT services post-Covid.

Profit margins

Though revenue is considered one of the crucial parameters for assessing a company's growth, profit margins are the most important indicators of a business's growth.

There are two profit margins that one can assess for any business - operating profit margin and net profit margin.

Operating profit margin is a measure of a company's profits arising from sales of goods and services to its revenue.

On the other hand, the net profit margin measures a company's profits arising out of all operating and non-operating activities to its revenue.

Both are expressed as a percentage of revenue. Hence, the higher the value, the better the company's profitability.

TCS vs HCL Profit Margins (2016-2021)

	2016-2017	2017-2018	2018-2019	2019-2020	2020-2021
Operating Profit Margin (%)
TCS	27.4%	26.4%	27%	26.8%	27.6%
HCL	21.8%	22.2%	23%	24.5%	26.6%
Net Profit Margin (%)
TCS	22.3%	21.0%	21.5%	20.7%	19.8%
HCL	18.1%	17.2%	16.7%	15.6%	14.8%

Source: Equitymaster

For TCS, the five-year average operating profit margins stand slightly higher at 27%. In comparison, HCL Technologies' five-year average operating profit margin is 23.6%.

The higher profits for TCS were led by cost-cutting initiatives taken by the company in the last few years. For HCL Technologies, higher digital business growth, which has higher margins, has led to a healthy operating profit margin.

Again, TCS is leading with a five-year average of 21.1% against 16.5% of HCL Technologies in terms of net profit margin.

Employee metrics

For an IT company, employees are the most valuable assets.

Companies have to ensure that their employees are satisfied by compensating them well, enhancing their skills and allowing them to grow in their careers.

By doing so, the employees' productivity will be high and which, in turn, will translate into high revenues for the company.

There are two employee metrics that one can use to assess the quality of the workforce of an IT company. They are attrition and revenue per employee.

Attrition measures the total number of people leaving the organisation voluntarily and involuntarily against the average number of employees during a given period of time.

The lower the attrition rate, the better, whereas high attrition indicates the company has to incur costs to hire and train new employees.

Revenue per employee indicates the revenue generated by each employee during the financial year. A higher number indicates higher employee productivity.

TCS vs HCL 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%
HCL	16.9%	15.5%	17.7%	16.3%	9.9%

Data Source: Annual Reports

TCS's attrition rate in the financial year 2021 stood at 7.2%, whereas HCL Technologies' attrition rate was slightly higher at 9.9%.

As of December 2021, TCS employs 556,986 employees across 150 nationalities, which is almost three times higher than HCL Technologies. Despite that, it has managed to keep its attrition at an industry-low level.

HCL Technologies, on the other hand, employs 197,777 employees across 157 nationalities.

In the financial year 2021, the revenue per employee for TCS and HCL stood at US$ 45,400 and US$ 60,200, respectively.

This indicates that HCL Technologies generate more revenue per employee than TCS.

TCS vs HCL 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
HCL	60.1	65.3	62.6	66.1	60.2

Data Source: Financial Results

Shareholder payout through dividends and buybacks

A company rewards its shareholders in the form of dividends or share buybacks. Dividends are paid out of profits and are usually consistent, whereas share buybacks do not happen frequently.

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.

HCL Technologies, on the other hand, bought back shares of Rs 75 bn from the market in two different transactions in the last five years. Recently the promoters entered a bulk deal to buy back 4.5 m shares from the open market.

Though the reason stated for buybacks is to return excess cash flows to the shareholder, companies generally carry out buybacks to make them attractive for investment.

When a company buys back shares, its earnings per share (EPS) rises. As a result, the Price to Earnings (P/E) ratio falls.

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.

TCS bought back more shares from the market than HCL Technologies indicating good growth prospects in the near future.

TCS vs HCL Dividend Ratio (2016-2021)

	2016-2017	2017-2018	2018-2019	2019-2020	2020-2021
Dividend Payout
TCS	35.1%	37.0%	35.7%	84.4%	43.2%
HCL	39.8%	19.2%	10.7%	24.5%	24.3%
Dividend Yield
TCS	2%	1.8%	1.1%	3.8%	1.5%
HCL	3%	1.3%	0.8%	1.3%	1.4%

Source: Equitymaster

Dividends are paid to shareholders in the form of cash or stock. Two dividend ratios help assess a company's dividend, and they are dividend payout ratio and dividend yield.

The dividend payout ratio tells how much of the earnings are paid as dividends. Higher the ratio better.

On the other hand, dividend yield tells what percentage of the price is the dividend paid. Again, the higher, the better.

The five-year average dividend payout for TCS is 47.1% against 23.7% of HCL Technologies. This indicates TCS is paying higher dividends to its shareholders than HCL Technologies.

TCS is again leading in terms of dividend yield. Its five-year average dividend yield stood at 2% against 1.6% of HCL Technologies.

Return on Equity

Return on equity (RoE) measures the management's ability to generate profits from equity capital. The higher the return, the better.

TCS vs HCL 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%
HCL	26.1%	23.9%	24.5%	21.6%	18.6%

Source: Equitymaster

TCS's RoE has been increasing since the financial year 2017, and its five-year average RoE stands at 34.5%.

On the other hand, HCL Technologies' five-year average RoE is at 22.9%, and its RoE has been falling since the financial year 2021, indicating the management's inefficiency in generating profits from equity capital.

Valuations

Valuation parameters such as Price to Earnings ratio (P/E) and Price to Book Value (P/BV) help in evaluating a potential investment.

They tell whether a company's share is overvalued or undervalued when compared to their peers and industry average.

P/E ratio measures a company's price to earnings per share (EPS). P/BV ratio, on the other hand, is a measure of a company's price to its book value per share.

A high ratio indicates the company's shares are priced at a premium against its peers.

TCS vs HCL 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
HCL	3.3	3.5	17.9	15.7

Source: Equitymaster

The P/E ratio of TCS in the financial year 2021 stood at 28.4, whereas, for HCL Technologies, it was at 17.9. This indicates that shares of TCS are priced slightly higher compared to HCL Technologies shares.

However, both TCS and HCL technologies shares are available at a premium compared to their five-year average P/E.

Again in terms of the P/B ratio, TCS's shares are priced at a premium with a P/BV ratio of 10.7. In contrast, HCL Technologies P/BV ratio is much lower at 3.3.

TCS's shares are also trading at a premium compared to its five-year average, while HCL Technologies shares are trading at a discount compared to its five-year average.

Key Acquisitions

A company can grow organically by establishing new centres in different places and inorganically by acquiring existing companies.

In the last five years, HCL Technologies acquired DWS Group, Geometric Limited, Strong-Bridge Envision, and C2Sis.

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

Sustainability efforts

The IT industry affects the environment significantly. The greenhouse gasses released from the workplace leads to air pollution.

Both TCS and HCL Technologies are doing their bit to reduce their environmental impact.

TCS aims to reduce its carbon emissions by 70% by 2025 and become net zero by 2030.

It is also adding a lot of green buildings to its real estate portfolio and is leveraging technology to reduce its power usage.

HCL Technologies, on the other hand, is cutting its carbon footprint by reducing the emission of greenhouse gasses. It is also taking steps to manage its waste and use energy efficiently.

The company also reduced its per capita water consumption and increased its renewable energy portfolio.

Impact of Covid-19

Though the lockdown slowed down both companies' revenue growth and profitability in the first quarter of the financial year 2021, the demand for IT services increased from the second quarter.

This was mainly because the pandemic has suddenly forced all businesses to adapt to digital technology.

As a result, both the companies saw an increase in the deals they secured and hence an increase in the revenue.

The total costs also came down due to lower travel charges, and they expanded profit margins.

Going forward, the demand for IT services will be high in the medium term leading to higher revenue growth and healthy profit margins.

Future Prospects

The demand for IT services has picked up faster than what TCS and HCL Technologies have anticipated.

Quick adoption of cloud computing and emerging technologies such as artificial intelligence, blockchain, and 5G have driven the demand up.

In the recent quarterly results, the total contract value (TCV) for HCL Technologies has gone up by 63% year-on-year (YoY) for their IT services and 70% YoY for their products and platform.

The company also added clients across all verticals, and it acquired companies to enhance its capabilities in data engineering and digital technologies.

It expects healthy double-digit revenue growth in this financial year.

On the other hand, TCS saw double-digit growth across all business verticals and added close to 30 new clients.

Going forward, it expects revenue growth from digital business and emerging technologies.

Despite the emergence of new variants of Covid, both companies are confident about their business growth.

Which is better?

TCS is leading in terms of profit margins. It is also paying high dividends to its shareholders and has a higher operational efficiency than HCL Technologies.

Despite a higher employee headcount, TCS has maintained an industry-low attrition rate for the past few quarters.

In terms of deals secured, TCS is again leading with the highest number of deals in the last quarter of the financial year 2021.

However, HCL Technologies is leading with respect to revenue growth and employee productivity.

The company's shares are also priced at a discount when compared to TCS. However, the gap in the valuations isn't very wide, making both prospective candidates 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 HCL

You can also compare both the companies with their peers.

TCS vs Infosys

HCL vs Wipro

TCS vs Tech Mahindra

HCL vs Cyient

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

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

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

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...