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Aided by new business orders and lower cost pressures, India’s February 2023 services output rose to its highest level in over a decade. The boost in India services sector comes as a surprise amid the global economic slowdown a drop in India’s GDP growth.
India’s services sector contributed over 50% to the country’s GDP, as per last year’s Economic Survey presented by the finance minister. Meanwhile, the information technology (IT) services sector is one of the growing sub-sectors. The IT and Business Process Management (BPM) market accounts for 9.3% of India’s GDP and 56% of the global outsourcing market, as per the India Brand Equity Foundation.
Last month, the Reserve Bank of India forecasted the country’s GDP growth for 2023-24 at 6.4%. Meanwhile, India’s goal of achieving its $5 tn economy target would mean the services sector is one of the central aspects, and IT services stocks could provide good exposure for investors.
We look at the top five IT services and consultation stocks in India.
TCS
Headquartered in Mumbai, Tata Consultancy Services (TCS) operates across 46 countries in the world. The firm provides cloud, IT consulting, cybersecurity, data & analytics, IoT and several other tech solutions across industries.
Having a market capitalization of $148.4 bn, TCS is India’s largest IT services firm. The company’s order book stood at $8.1 bn at the end of September 2022. The stock has fallen 7.45% in the past year and has a P/E ratio of 30.16.
Brokerages have a mixed view on TCS, with some expecting the stock to see the impact of slowing orders from firms in the west, whereas others believe the vendor consolidation by clients might actually help the India services sector firm to perform better in the coming months.
In the most recent development about the company, TCS is said to be working on renewing its contract with British retail firm Marks & Spencer for business process and digital transformation services, which could add $1 bn to the IT firm’s order book.
Infosys
Based on a report by brand valuation firm Brand Finance, Infosys is the fastest-growing IT services brand in the world. Having a clientele in more than 50 countries, the company aids businesses in digital transformation and provides IT services and consulting.
Having a market capitalisation of $73.3 bn, Infosys is the second biggest IT firm in India. The company’s stock has fallen nearly 20% in the past year and has a forward P/E ratio of 25.01.
The company recently upgraded its revenue growth forecast for FY2023 on the back of a strong order book.
“IT services deal activity was reasonably healthy with TCV improving on QoQ basis for Infosys, Wipro, TechM and Mphasis. Commentaries from large US banks suggest that the banks will continue with their multi-year technology transformation agendas. Citi and Bank of America plan to increase their tech spend by 5 per cent and 9 per cent YoY respectively, in CY23,” Indian financial services provider ICICI Securities said in a note.
HCL Tech
HCL Tech is another major IT firm in India services sector and offers a range of services such as IT infrastructure management, digital process operations, cloud-native services, cybersecurity, digital and analytics, and IoT among others.
The company has a market capitalization of $36.6 bn. HCL Tech’s stock has fallen 6.66% in the past year and has a forward P/E ratio of 20.65.
Founded in 1976, the company has a presence in over 60 countries. Some of its well-known clients include Dell, Intel, Adobe, Amazon AWS, VMware, TSMC and others.
The Nifty IT index went through a correction recently, and financial analysts are now expecting stocks such as HCL Tech to perform well.
“Since the start of this year, IT stocks have been performing well. We are bullish on this sector up to the 34,000 level on the higher side, and the bullish view will be valid as long as it sustains above the 26,000 level, according to the technical chart” said Rameshver Dongre, Research Analyst – Equity Research, told an Indian publication.
Wipro
Wipro was founded over 75 years ago and is serving clients across 66 countries. The company has over 250,000 employees and more than 1,400 active clients.
Wipro has seen its stock fall over 33% in the past year, and now has a market capitalization of $26 bn. The stock has a P/E ratio of 18.68 and a forward P/E ratio of 18.65. The company’s price-to-book ratio stood at 2.82 as of March 9.
“From a long-term perspective, we believe Wipro has a strong deal pipeline and superior financial structure. However, it lags in execution to capitalize on growth as compared to peers. Rising concerns over the prospects of large economies along with prevailing supply-side constraints pose uncertainties over the company’s short-term growth rates,” Axis Securities said in a note.
LTIMindtree
L&T Infotech and Mindtree merged late last year to form the fifth-largest IT firm in India, LTIMindtree. The combined corporation has a presence in over 30 countries, and some of the clientele include CISCO, databricks, Adobe, Dell, HP, IBM and others.
“By combining their strengths and unlocking the benefits of scale, LTIMindtree will operate with a stronger, highly diversified portfolio of end-to-end services and skills across a wider market footprint,” said the company in an exchange filing.
The company has a market capitalization of $16.8 bn, a P/E ratio of 29.66 and a forward P/E ratio of 30.68. The company’s price-to-book ratio stands at 8.67.
Earlier in January, Macquarie in a note said LTIMindtree is among its top picks in the Indian IT services sector as it now has much lesser risk compared to before the merger. It sees an upside of over 75% for the stock compared to the levels in mid-January.
“From a long-term perspective, we believe LTIMindtree is well-placed for encouraging growth, given its multiple long-term contracts with the world’s leading brands. Richer revenue visibility gives us confidence in its business growth moving forward. However, rising concerns over the prospects of large economies along with prevailing supply-side constraints pose uncertainties over the company’s short-term growth rates,” Axis Securities said in a note in late January.
