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Best IT Stocks in India

Best IT Stocks in India

The Indian IT sector is vast.

Filled with behemoths such as TCS, Infosys and Wipro, the IT industry can be divided into four main segments - IT services, Business Process Management, Software Products and Engineering Services, and Hardware.

The sector contributes 7.4% to India's GDP as of 2022 and comes with massive tailwinds. It is expected to contribute 10% to India's GDP by 2025.

Post the pandemic, the growth prospects of the sector largely changed. It can be said that the sector is at an inflection point post pandemic.

When Covid struck, work dynamics changed, and the IT sector was back with a bang. The sector was perhaps one of the few sectors whose growth had an inverse relation with the pandemic.

As the pandemic got worse, the IT sector's fortunes got better. Physical proximity became a strict no-no, and the digital world came to the rescue.

Offices, schools, banks, administrative work, everything started going online, providing a massive tailwind to the sector.

While the Covid wave has now subsided, the tech revolution across industries has just begun.

The demand for IT services has increased because of the convergence of digitalisation, automation, and the success of innumerable technology platforms and apps.

Concepts like cloud storage, IoT (Internet of things), artificial intelligence (AI), and machine learning (ML) have now come of age.

As the world becomes more connected, the role of Indian IT companies has evolved from outsourcing to becoming a partner in innovation.

While the world focuses on big tech stocks like Google, Netflix and Apple among others, keep in mind that India is not far behind on innovation and in the future, there will be a separate category of stocks filtered as India's big tech stocks.

Porter's Five Forces Analysis of the IT Sector in India

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry.

These are barriers to entry, bargaining power of suppliers, bargaining power of customers, threat of substitutes and competition within the industry.

A change in any of the forces normally requires a company to re-assess the marketplace.

Let us have a look at how these five forces shape the Indian IT sector -

#1 Barriers to Entry

The most attractive segment is one in which barriers to entry are high as they restrict the threat of new entrants.

Conversely if the barriers are low, the risk of new companies venturing into a given market is high.

In the IT sector, barriers to entry are low, because the setup cost is almost negligible. However, it is high in value-added services where in-domain expertise can create a barrier.

The size of a particular company and brand-image also creates barriers to entry, as such firms have built long-term relationships with major clients.

#2 Bargaining Power of Suppliers

The bargaining power of customers is the ability of suppliers to put the firm under pressure. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

This is low in the IT industry as a large supply of human resource is available at low cost from around the world.

#3 Bargaining Power of Customers

The bargaining power of customers is the ability of customers to put the firm under pressure. It is high if buyers have many alternatives and low if they have few choices.

In the IT sector, the bargaining power of customers is moderate.

Top IT companies in India enjoy the advantage of high switching costs. Once a client selects a particular IT company as its partner, it becomes dependent on the company for all its upgrades and technology requirements making it difficult to switch.

#4 Competition

For most industries, having an understanding of the competition is vital to successfully marketing a product.

The competition in the IT industry is high. The competition is global in nature and stretches across boundaries and geographies.

In recent years, startups have started to receive increased attention and the number of startups has also increased rapidly.

It is expected to intensify due to the attempted replication of the Indian offshoring model by MNC IT majors as well as small startups.

#5 Threat of Substitutes

A substitute product uses a different technology to try to solve the same economic need.

This is moderate for IT companies in India.

Certain countries like China, Taiwan and Korea have started to develop an environment required for growth of the IT sector. Indian companies need to innovate to have an edge over the others.

Porters Five Forces Analysis of the Banking Sector in India

chart

When to Invest in IT Stocks

The IT sector has been one of the sectors that has driven the stock market rally in the past decade.

As revenue for the IT sector is mainly export oriented, it is largely impacted by the depreciation of the rupee versus the US dollar.

A depreciating rupee is beneficial for the IT sector and vice versa and Indian IT companies have various hedging policies that help them benefit from it.

Therefore, a good time to invest in the IT sector would be when the rupee is depreciating.

Here are some points you need to keep in mind before investing in IT stocks.

Key Points to Keep in Mind while Investing in IT Stocks in India

#1 USD/INR Exchange Rate

As revenue for the IT sector is mainly export oriented, it is largely impacted by the value of the rupee versus the US dollar.

A depreciating rupee is beneficial for the IT sector as most IT companies earn their revenue in US dollars and vice versa.

A weak rupee increases the net asset position in rupee terms for Indian IT companies. This strengthens their balance sheet.

However, the fall or rise in the rupee tends to have a short-term effect since Indian IT companies have various hedging policies.

Any kind of impact, large or small, is usually for a limited duration only. Over the longer term, the impact fades away.

#2 Attrition rate

Attrition is an inevitable part of any business, but most importantly, this is a bigger problem for the people-intensive IT industry.

A huge number of employees leaving their jobs remains a big concern for IT firms even today.

Hiring a new employee is always a costlier affair. It incurs recruitment expense and training cost coupled with a temporary loss of productivity.

Before investing in an IT company, check the company's attrition rate spanning multiple quarters.

#3 Focusing on new age technologies and acquisitions

The pandemic and lockdown accelerated the shift to digital transformation for businesses and virtual way of working.

It fast forwarded ecommerce boom, integration of tools and technologies across different industries, work from remote, and the rise in automation.

As the disruptive shift happens, IT companies will need to evolve with the world. Companies focusing on new age technologies and cater to client needs with tools such as automation, etc. will be in demand.

So, before you invest in an IT company, check its growth prospects and see whether it has exposure to unlisted startups which are chasing opportunities in new areas.

Usually, IT companies have stakes in multiple unlisted startups, which can in the future, turn out to be their x-factor.

#4 Profitability of the company

Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run.

That is why IT stocks offering decent return on equity (ROE), sales growth and profit growth appeal to many.

Also, before you compare the performance of two IT companies, say for instance, Infosys vs TCS, do factor in the operating margins.

Here's a list of top IT companies in India based on their consolidated net profit.

Rs m Net Sales Operating Profit Net Profit ROE (%) ROCE (%)
Tata Consultancy Services Ltd. 1,603,410 537,310 381,870 50.8 66.7
Infosys Ltd. 1,039,400 310,520 212,350 30.4 40.6
Wipro Ltd. 595,744 171,173 121,353 24.6 27.6
HCL Technologies Ltd. 406,380 159,920 108,740 25.3 30.9
Info Edge (India) Ltd. 15,625 6,407 89,225 97.4 109.5
Tech Mahindra Ltd. 347,261 70,081 49,131 19.7 23.8
Larsen & Toubro Infotech Ltd. 144,064 33,666 22,609 29.7 40.1
Oracle Financial Services Software Ltd. 38,961 24,474 18,112 32.5 41.6
Mindtree Ltd. 105,253 25,028 16,528 33.9 46.2
Mphasis Ltd. 73,896 18,283 12,353 28.8 36.1
Data Source: Ace Equity
Data as of March 2022

#5 Dividend yields

IT companies generally have huge cash reserves, as they do not require very high capital expenditure for growth.

As dividends are mostly paid from the remaining share of profits once essential expenses are met, companies from the IT sector are some of the highest dividend paying companies.

Here's a list of top IT companies in India that score well on dividend yield and dividend payout.

Company Name Dividend Payout ratio (%) Dividend Yield (%)
Allsec Technologies Ltd. 70.3 8.6
Oracle Financial Services Software Ltd. 90.5 5.3
HCL Technologies Ltd. 104.9 3.6
Tech Mahindra Ltd. 89 3
Sonata Software Ltd. 92.8 2.8
Firstsource Solutions Ltd. 62.9 2.8
Sasken Technologies Ltd. 29.3 2.7
Cyient Ltd. 46.6 2.6
Quick Heal Technologies Ltd. 33.4 2.5
WEP Solutions Ltd. 69.9 2.3
Data Source: Ace Equity

#6 Valuations

Two commonly used financial ratios used in the valuation of stocks are -

Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

To find stocks with favorable P/E Ratios, check out our list of stocks according to their P/E Ratios.

Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

To find stocks with favorable P/BV Ratios, check out our list of stocks according to their P/BV Ratios.

Top IT Stocks in India

Well established IT companies with healthy relationship with clients and long-term contracts stand to immensely benefit, with so many factors positively affecting the industry.

Here are the top IT stocks in India which score well on crucial parameters.

#1 TCS

#2 Infosys

#3 Wipro

#4 Info Edge

#5 Mphasis

#6 Oracle Financial

#7 NIIT

For more details, check out Equitymaster's stock screener for filtering the best IT stocks in India.

List of IT Stocks in India

The details of listed IT companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of IT (large) stocks and IT (others) stocks.

You can also read our IT sector report and check the latest IT sector results.

Best Sources for Information on the IT Sector

Indian Brand Equity Foundation IT Sector Report - https://www.ibef.org/industry/information-technology-india

Ministry of Electronics and Information Technology - https://www.meity.gov.in/

So there you go. Equitymaster's detailed guide on the best IT stocks in India is simple and easy to understand. At the same time, it offers detailed analysis of both the sector and the top stocks in the sector.

Here's a list of articles and videos on the IT sector and top IT stocks in India. This is a great starting point for anyone who is looking to explore more about IT stocks and the IT sector.

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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