Which stock is your best bet among the top four IT services companies?

Which stock is your best bet among the top four IT services companies?

Which stock is your best bet among the top four IT services companies? Photo

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In a quarter that has seen demand for IT services pick up dramatically, four of India’s large IT services companies have shown that the markets expectation of their performance was right.

Tata Consultancy Services (tinyurl.com/tcsQ2), Wipro (tinyurl.com/wiproq2), Infosys (tinyurl.com/q2infosys) and HCL Technologies (tinyurl.com/hclq2) have all reported sequential rise in revenues during the quarter ended September 30, 2020.

Infosys, TCS and HCL Tech have announced interim dividends, while TCS and Wipro have announced share buybacks at the end of the quarter. This shows that these companies are generating, and expect to generate, decent cashflows in the coming quarters. All four have also restarted pay hikes in the second half of 2020-21 and have started paying out variable incentives to employees. This shows that the uncertainty surrounding their businesses, witnessed when the Covid-19 pandemic broke out, is fading away.

One common theme across TCS, Infosys, Wipro and HCL Tech was the growth in revenues from retail clients. This segment was affected the most in the quarter ended June 30, 2020.

TCS, Infosys, Wipro and HCL Tech saw dollar revenues rise sequentially by 12 per cent, 10.6 per cent, 5.6 per cent, and 8.4 per cent, respectively. The pick-up in revenues shows that clients are trying to adapt to the new way of doing business under the cloud of the pandemic.

Although HCL Tech did see muted sequential growth (2.6 per cent in dollar terms) in financial services, the trend was of increased technology spends by clients in this vertical.

TCS, Infosys and Wipro saw sequential revenue growth in dollar terms of 9.3 per cent, 7.8 per cent and 5.4 per cent, in that order. Some of this increased spending was on account of clients adapting their systems to distribute the large stimulus package (unveiled in the US and Europe) to their customers.

Life sciences and healthcare was also vertical that saw robust sequential revenue growth across all four companies. It is difficult to tell whether this was caused due to the pandemic or whether this is a sustainable trend.

But the larger theme that unfolded in the past six months for TCS, Infosys, Wipro and HCL Tech was clients pushing to adapt cloud and digital technologies into their core business operations, including those who had been sitting on the fence.

TCS believes the migration and adoption of cloud technologies bodes well for future revenue growth as this will push clients to adopt native cloud capabilities such as artificial intelligence, internet of things and machine learning. It also believes that this is the beginning of a multi-year technology spending cycle.

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