Infosys vs HCL Tech: Which IT major is a better long-term stock?

After a weak March quarter show, the IT sector is expected to remain underperformer and disappoint Street for most of the current financial year FY24. Most experts remain negative on the sector on the back of weakness in demand and poor overall industry growth outlook. Amid this backdrop, let's analyse, between Infosys and HCL Tech, which IT stock has better long-term growth opportunities.

Stock Price Trend

In the last one year, HCL Tech outperformed the benchmark while Infosys was an underperformer. While Infosys has lost around 8 percent in the last 1 year, HCL Tech has advanced around 19 percent in this period. In comparison, the Nifty IT rose over 3 percent in this time.

Meanwhile, in 2023 YTD, as well, Infosys lost nearly 15 percent as against a 10 percent gain in HCL Tech and a flat but positive Nifty IT.

IT major Infosys gave negative returns in 4 of the 6 months in the current calendar year whereas HCL Tech was positive in 3 months of 2023 so far.

Infosys has lost over 2 percent in June so far after a 5.2 percent gain in May. Meanwhile, it shed 12.3 percent, 4 percent and 3 percent, respectively in April, March and February. The stock added 1.7 percent in January.

HCL Tech, on the other hand, has swung between gains and losses each month this year. It is flat but in the red in June so far after a 7.6 percent jump in May. Meanwhile, it lost 2 percent in April, rose 0.7 percent in March, again fell 4 percent in February, and rose 8 percent in January.

From its 52-week high of ₹1,672.45, hit in December 2022, Infosys has fallen over 23 percent till date, meanwhile, HCL Tech is just one percent away from its 52-week high of ₹1,156.80, hit in February this year.

Meanwhile, in the long term - last 3 years, Infosys has jumped over 83 percent whereas HCL Tech has advanced around 97 percent.

Earnings

In March quarter, Infosys reported a weak set of numbers for the March quarter of FY23 (Q4FY23). Its results came in below Street estimates for the quarter under review.

In Q4, the firm posted a 7.8 percent year-on-year (YoY) rise in consolidated net profit at ₹6,128 crore. It gave 4-7 percent revenue growth guidance for FY24 amid macroeconomic uncertainties, well below analysts' expectations of a 10.7 percent growth. This revenue growth guidance is the slowest in six years. Before this, the IT firm posted a 3 percent revenue growth in fiscal 2018.

Infosys, during the Q3 earnings announcement in January this year, had raised FY23 revenue guidance to 16-16.5 percent against the previously projected band of 15-16 percent.

Its consolidated revenue in constant currency terms jumped 15.4 percent YoY in the fourth quarter of FY23 at ₹37,441 crore. On a sequential basis, the revenue fell by 3.2 percent. Meanwhile, dollar revenue for the quarter came in at $4,554 million, down 2.2 percent QoQ.

HCL Tech, on the other hand, reported in-line earnings for the March quarter of FY23 (Q4FY23). The company's net profit rose 10.6 percent year-on-year (YoY) to ₹3,981 crore in the March quarter as against ₹3,599 crore in the year-ago period. Its revenue from operations for the quarter came in at ₹26,606 crore, up 17.74 percent from ₹22,597 crore in the same period last year. Constant currency (CC) revenue was down 1.2 percent quarter-on-quarter (QoQ) and up 10.5 percent on-year. Meanwhile, its US dollar revenue came in at $3,235 million, up 8.1 percent YoY.

"Our pipeline is near an all-time high, which reflects our differentiated business mix and strong client demand for our offerings. We have added 3,674 employees this quarter and overall employee strength has now grown beyond 225000. All these set us well in FY24 for a healthy revenue growth in the 6-8 percent range with operating margins in the 18-19 percent range,” said C Vijay Kumar, CEO & MD, HCL Tech.

Which is a better stock for the long term?

Omkar Tanksale, Senior Research Analyst - IT, Axis Securities has picked Infosys over HCL Tech

"From a longer-term perspective, Infosys stands a better chance to grow as the company has strong digital capabilities. The deal pipeline is robust and has better execution capabilities. Infosys has performed better in the past and surpassed the growth of its peers. However, for the next couple of quarters, HCL Tech may perform better as there are lesser spending cuts in the ER & D space, but for the longer term perspective (Viz 3 to 5 years), Infyosys is a better bet," he explained.

ICICI Securities believes Infosys is the best pick in the IT space right now.

The brokerage believes headwinds are largely priced in and Infosys has the most attractive risk-reward in the IT space. It has retained its buy call on the stock with a target price of ₹1,641, indicating an upside potential of almost 26 percent.

"INFY is trading at an attractive valuation of 19.6x 1-year forward P/E closer to its last 15-yr average multiple of 19x. We believe soft revenue growth in FY24 is already factored in the current stock price, and the announcement of mega-deal wins will potentially help the stock re-rate from these levels. INFY has already announced 4-5 deal wins in the current quarter (Q1FY24) and has a good mega deal pipeline with some deals in advanced stages. We believe the risk-reward ratio is favorable with a limited downside (8-9 percent) for INFY from current levels in a bear case scenario of an 8-9 percent YoY CC (constant currency) revenue growth in FY25E and FY26E," explained the brokerage.

However, on a contrarian view, Nirvi Ashar - Fundamental Analyst, Religare Broking prefers HCL Tech over Infosys

Ashar believes that both stocks have better growth opportunities going ahead as demand for IT is resilient as well as easing attrition and continuous deal momentum for digital transformation and other services like cyber security, artificial intelligence, etc. bodes well for both revenue and margin growth.

However, her preference slides more towards HCL Tech, largely because of valuation comfort and management’s optimistic growth guidance from a medium to long-term perspective as compared to Infosys. Besides, the exit of top management at Infosys in the past 2-3 quarters as well as cautious commentary from Infosys management puts our preference towards the stock at a back seat. We have a Buy rating on HCL Tech with a target price of ₹1,333.

Sonam Srivastava- Founder at Wright Research also liked HCL Tech over Infosys

"Both Infosys and HCL Tech are prominent Indian IT companies, but there are key differences that may make HCL Tech a more appealing long-term investment. HCL Tech has a stronger presence in emerging markets like India, China, and Brazil, which are anticipated to grow faster than developed markets. Additionally, HCL Tech's focus on digital transformation positions it well for future growth, as it has a successful track record in delivering such projects. Furthermore, HCL Tech boasts higher profitability than Infosys, enabling it to generate more cash flow and invest in growth initiatives while returning capital to shareholders. Nonetheless, it's crucial to conduct personal research before making investment decisions, as past performance doesn't guarantee future outcomes," she said

Suman Bannerjee, CIO, Hedonova also believes HCL Tech is the better option

"HCL Tech appears to have better long-term growth opportunities compared to Infosys. Market experts suggest that HCL Tech has delivered better results than Infosys and TCS. HCL Tech's Q4 earnings were broadly in line with market estimates. On the other hand, Infosys reported sequentially weak Q4FY23 numbers, with a decline in PAT and revenue," Bannerjee said.