TCS vs HCL Tech vs LTIMindtree: Which IT major to choose for long term?

Despite muted June quarter numbers, Indian IT companies are expected to rebound in the next couple of quarters with sustained margins and a growing order book size. The sector's valuation has dropped significantly by over one-third, making it an attractive long-term investment option. 

The next phase of growth is expected to be driven by a recovery in demand, client spending, and focus on product development with newer technology including automation, AI, cyber security, etc which are in high demand.

Amid this backdrop, let's analyse between Tata Consultancy Services (TCS), HCL Tech and LTIMindtree, which IT major has better growth opportunities in the long term. All three firms have been in focus after reporting their June quarter earnings last week.

Stock price trend

In the last one year, HCL Tech has been a better performer between the three. HCL Tech jumped 25 percent in this period while TCS and LTIMindtree gained 10 percent and 9 percent, respectively. In comparison, the Nifty IT index has risen 7.6 percent in the last 1 year.

However, in 2023 YTD, LTIMindtree was the top performer, up 14 percent as against an 11 percent rise in HCL Tech and 6 percent gain in TCS. In comparison, the IT index has advanced 8.8 percent this year so far.

HCL Tech has given positive returns in 4 of the 7 months this year while TCS and LTIMindtree have been in the green in 5 of the 7 months in 2023. But in July so far, HCL Tech and LTIMindtree shed 2.7 percent and 4.3 percent respectively whereas TCS added 4.8 percent.

In the long term, 3 years, LTIMindtree has given multibagger returns, surging 119 percent as against a 77 percent rally in HCL Tech and a 55.6 percent jump in TCS.

Earnings

In the June quarter (Q1FY24), IT major TCS posted a 17 percent year-on-year (YoY) jump in its consolidated net profit at ₹11,074 crore versus ₹9,478 crore in the year-ago period. Sequentially, the net profit dropped around 3 percent. Meanwhile, its consolidated revenue for the quarter under review rose 13 percent to ₹59,381 crore during the quarter ended June as against ₹52,758 crore in the corresponding quarter last year. Sequentially, it was up just 0.4 percent from ₹59,162 crore in Q4FY23.

In constant currency terms, TCS’ revenue grew about 7 percent YoY. The company’s order book stood at $10.2 billion. While the net profit was above estimates, the revenue came in below Street expectations.

“We remain confident in the longer-term demand for our services, driven by the emergence of newer technologies,” said K Krithivasan, Chief Executive Officer and Managing Director of the company.

Meanwhile, HCL Tech reported a disappointing set of earnings for the April-June quarter (Q1FY24). The IT major's Q1 earnings missed the Street's estimate on both the profit and revenue front. Even though the company posted a 7.6 percent year-on-year (YoY) rise in its Q1 net profit at ₹3,534 crore, on a sequential basis, the profit fell 11.2 percent. Meanwhile, its revenue was up 12 percent YoY to ₹26,296 crore in the quarter under review, but it also declined 1.2 percent sequentially on the back of a slowdown in deals and verticals like hi-tech and telecom. The order booking also fell 24.5 percent QoQ to $1.6 billion, however, the firm maintained its revenue guidance of 6-8 percent for FY24 in CC (constant currency) terms and operating margins of 18-19 percent.

Finally, LTIMindtree reported a net profit of ₹1,114 crore for the fourth quarter, which is flat compared with ₹1,108 crore clocked in the corresponding quarter of last year. Revenue from operations during the reporting quarter surged 22 percent to ₹8,691 crore as against ₹7,128 crore in the same quarter a year ago. In dollar terms, revenue stood at $1.05 billion, rising 12 percent year-on-year and growth of 1 percent quarter-on-quarter.

“We are pleased to report a strong FY23, with a broad-based full-year revenue growth of 19.9 percent in constant currency,” said Debashis Chatterjee, CEO and MD of LTIMindtree.

Which stock between TCS, HCL Tech and LTIMindtree has better long-term investment opportunities?

Siddhesh Mehta, Research Analyst, SAMCO Securities has picked TCS between the three

Among the three IT majors, our preferred choice is TCS. The company’s commitment to innovation, research and development enables it to stay at the forefront of technological advancements. This places the company in a favourable position to cater to evolving client demands and maintain its competitive edge. It has established itself as a global leader with a track record of consistent growth over the years. Further, TCS’s consistent dividend payout makes it an attractive choice for investors seeking long-term stability and income. It is currently trading at its 5-year average PE ratio of 29 which presents an attractive buying opportunity for the investors.

Vinod TP, Research analyst at Geojit Financial Services also likes TCS

We have an optimistic outlook for the IT sector and identify TCS as a strong long-term investment pick. Despite unprecedented macroeconomic conditions, the company's resilient performance is evident through its outstanding RoE (46.1 for FY24E) and EBITDA margin (26.2 for FY24E), which surpass peers. Though revenue growth may be subdued in the short term, a healthy order book, sustained focus on digitalization, and generative AI augur well for long-term performance.

Nirvi Ashar - Fundamental Analyst, Religare Broking prefers TCS the most

Amongst the IT majors, our preference will be in the order of TCS, HCL Tech and LTIMindtree, given the leadership position of TCS. Besides, TCS and HCL Tech both have a strong client base and have been adding large clients and long-term deals. Further, the order book as well as their progress on developing products in newer technology as per demand will bode well for future growth. Additionally, both companies are placed at a reasonable valuation as compared to LTIMindtree.

Suman Bannerjee, CIO, Hedonova, as well, has chosen TCS

I think Tata Consultancy Services would be a suitable long-term investment choice among the given IT majors. TCS has demonstrated its commitment to innovation and efficiency through its recent collaboration with the British Broadcasting Corporation (BBC) to enhance finance and payroll functions using AI-driven technology.

With the implementation of TCS Cognix, an AI-powered suite, TCS aims to improve decision-making and increase operational efficiency. The unified operations model and the new partner payroll platform will further streamline processes and enhance agility within the finance operations.

Gaurav Bissa, VP, InCred Equities likes both HCL Tech and TCS

HCL Tech and TCS both look very strong on the long-term charts. Both are in long-term uptrends with the possibility of medium-term correction coming to an end. TCS is expected to give a structural and gradual up move in the long term whereas HCL Tech can be more aggressive as it has bounced after retesting a 20-year rising trendline breakout.

Mohit Jain, Research Analyst, Anand Rathi Institutional Equities, meanwhile, prefers LTIMindtree

Our long-term bet would be LTIMindtree: Both LTI and Mindtree in the past have delivered results in the top quadrant and are expected to continue the momentum. We expect, with the resumption of work on some BFSI assignments and recovery in Hi-tech, to lead the growth going forward. From a valuation standpoint, LTIMindtree now trades at a significantly higher multiple than pre-pandemic averages. This, in our opinion, reflects its size, improved performance, and expectations of merger synergies.