TCS vs Infosys vs HCL Tech: Which is the best IT stock for long-term investing? MintGenie asks 3 analysts for their pick

IT majors Tata Consultancy Services (TCS), Infosys and HCL Tech recently declared their September quarter (Q2) results for the financial year FY23. The Q2 earnings for all three firms either met or exceeded analyst expectations despite recent fears of a recession in the US and other global headwinds. But which of these three is the best of the lot? Let's find out:

Stock price trend

The IT sector has been on a downward trend in the last 1 year with the Nifty IT index declining over 20 percent in this period. In the last 1 year, HCL Tech cracked 22 percent, followed by Infosys, which fell 17 percent while TCS shed 15 percent.

However, post the results, all stocks rose and turned positive for the month of October so far. HCL Tech rallied 9 percent, Infosys added 5.5 percent and TCS was up over 4 percent in the current month.

In the 10 months of 2022 so far, TCS has been positive in only 3 of those - March (5 percent), July (1 percent) and October (4.4 percent). It has fallen the most in September down 6.5 percent followed by April and May when it lost 5 percent each.

Infosys has also followed the same trend, positive in just those three months of the 10 months of 2022 so far. It rose 11 percent in March, 6 percent in July and 5.5 percent in October. Meanwhile, it has shed the most in April, down 18 percent followed by September, down 5 percent.

HCL Tech, too, was in the green in just 3 of the 10 months of 2022. It was up 2.5 percent and 3.3 percent in February and March respectively. since March it gave negative returns in every month till rising 9 percent in October. It lost the most, 17 percent in January and tanked 20 percent between April-September.

In 2022 YTD as well as the three IT stocks fell. While the Nifty IT index shed 27 percent; HCL Tech lost 23 percent, followed by Infosys, which shed 21 percent, and TCS, down 16 percent.

Earnings

All three firms reported strong earnings for the September quarter.

HCL Tech

IT major HCL Technologies beat Street expectations to report a 7.1 percent YoY rise in its net profit for the September FY22 quarter (Q2FY22) at ₹3,489 crore. On a sequential basis, its profit rose 6.3 percent. Meanwhile, the firm's revenue jumped 19.5 percent YoY to ₹24,686 crore. On a sequential basis, this rise was 5.2 percent. Both the revenue and profit were above analysts’ estimates. Further, the board of directors also approved a dividend of ₹10 per share.

In constant currency terms, HCL Technologies’ revenue in the second quarter rose 16 percent YoY and 3.8 percent QoQ. Unexpectedly, the company also raised its revenue growth guidance for FY23. HCL Tech now sees 13.5-14.5 percent growth in revenue in constant currency, against 12-14 percent projected earlier. However, the company cut the upper end of its EBIT margin guidance for FY23. It now sees margins in the 18-19 percent range against 18-20 percent earlier.

Infosys

Infosys also beat street expectations reporting an 11 percent YoY rise in its consolidated net profit to ₹6,021 crore in the September 2022 quarter (Q2FY23). It posted a profit of ₹5,421 crore in the same period last year. Meanwhile, its revenue from operations came in at ₹36,538 crore, up 23.4 percent YoY as compared to ₹29,602 crore reported in Q2FY22. Sequentially, revenue grew 6 percent while the net profit jumped 12.3 percent over the previous (June) quarter.

The company further informed that revenues in constant currency terms jumped 18.8 percent YoY and 4 percent QoQ. Its operating margin, however, declined 2.1 percent YoY to 21.5 percent, but it was still up 1.4 percent on a QoQ basis. The Bengaluru-headquartered company raised its FY23 revenue growth guidance to 15-16 percent, pushing the forecast towards the higher end of the previously-projected 14-16 percent band, buoyed by "strong large deals pipeline" and good demand momentum despite global macroeconomic concerns.

TCS

TCS' Q2FY23 consolidated profit rose 8.4 percent year-on-year (YoY) to ₹10,431 crore, beating analysts’ estimates. Revenue from operations for the quarter rose 18 percent YoY to ₹55,309 crore. The firm said that the immediate target would be to take the operating profit margin to 25 percent by the fourth quarter of the fiscal by focusing on improving utilisation and upping the realisations, and then touch the aspirational band of 26-28 percent.

The Tata group company, however, said the operating environment is "challenging" and warrants "vigilance", even though the headwinds posed by factors like recession in its biggest market US, rising inflation around the world and currency volatilities are yet to materialise into its order pipeline.

Which stock to pick?

Vinit Bolinjkar, Head of Research at Ventura Securities has picked HCL Tech among the three. Between TCS, Infosys and HCL Tech, we recommend HCL Tech due to its effective cash utilization for acquisitions and business diversification, said Bolinjkar.

"HCL Tech kept its dividend payout lower than its peers (5 years avg dividend payout – HCL Tech: 32.6 percent, TCS: 48.4 percent and Infosys: 56.4 percent) and used that cash to propel its business performance and product diversification. This resulted in a revenue CAGR of 12.5 percent during FY17-22, while EBITDA and net profit grew at a CAGR of 14.6 percent and 9.5 percent respectively," he noted.

As per Bolinjkar, this is superior to that of its peers as TCS recorded revenue/EBITDA/net profit CAGR of 10.2 percent/10.4 percent/7.8 percent respectively, while Infosys recorded revenue/ EBITDA/net profit CAGR of 12.2 percent/11.1 percent/9.1 percent respectively.

He further pointed out that over the last 5 years, HCL Tech has spent $725 million on 11 acquisitions, compared to $398 million by Infosys on 9 acquisitions. These acquisitions in diversified products and services are expected to sustain revenue performance and generate new business opportunities in the coming years, noted Bolinjkar and could further reduce the valuation gap with peers. HCL Tech is trading FY25 P/E of 13.6X, which is a 37 percent discount to TCS 21.5X and a 28 percent discount to Infosys 18.9X, he further informed.

Vaibhav Agarwal, small case manager & Head of Research, Basant Maheshwari Wealth Advisers LLP has also picked HCL Tech.

"Although we can’t recommend any stocks, we like HCL Tech among the large-cap IT universe. HCL Tech has the highest growth for the services business in a large cap. The business outlook has improved with the company raising the revenue guidance. The stock trades much cheaper compared to a TCS or Infy and is available at a 5 percent dividend yield," he said.

Nirvi Ashar, Manager, Fundamental Research, Religare Broking Limited, meanwhile, stated that, overall, we are bullish on all three large-cap IT stocks as compared to midcap IT stocks given its comfortable valuation, strong order book and better cost management during tough situations. Amongst them we have HCL Tech and Infosys under our coverage, Ashar added.

IT Outlook

With the IT stocks on a path of correction, Bolinjkar believes that the Indian IT space will continue to underperform due to recessionary pressure in developed markets of the US & Europe and wage inflation.

He recommended the investors buy Indian IT stocks in tranches and accumulate more on dips.

Ashar also advised investors to utilize this correction as a strong buying opportunity in large-cap IT names as the downside seems limited and valuations are not expensive.