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IT Services Companies like TCS and Infosys - Must have in your portfolio?

With all the major IT services companies like TCS, Infosys and HCL Tech trading around their All-Time-High, let's discuss key matrices of these companies and see the opportunities in these companies from here for retail investors, if any exist. 


Growth prospects

Let's start with growth, because in the end, growth will decide the stock price. If company is growing it's revenue, margins are consistent or expanding, net profit is increasing, stock price will have no option but to go up in the long run. As world is moving fast towards digitalization after covid-19, adoption of tech and tech-enabled services are need of the time and is critical for businesses now. And Indian IT services companies have a role to play here, as technology provider and at times technology enabler. Future is looking good from here which we can see in revenue guidance of top companies which is going as high as 20% per annum.  


Dividends/ Buybacks/ Bonus Shares

These companies are huge cash generating machines and have tons of free cash even after investing part of it back in the business. Hence, they are not shy of giving it back to shareholders by way of dividends or buybacks or bonus shares. Dividend yield is between the range of 1% to 2% (reduced due to significant increase in stock price in last 1-2 years) and buybacks or bonus shares are also frequent like once every 2-3 years. 


Quality 

Most of the IT services companies in India are debt-free, have high margin (20-25% operating margins), have professional management in place and proven track record of corporate governance. All these factors combined with non-cyclical nature of this business makes them quality king in my opinion. 


Hedge against depreciation of Indian Rupee

Major portion of revenue of Indian IT services companies comes in foreign currency and their major expense which is employee cost is in INR, which gives them benefit of currency fluctuation also. So, if INR is weakening against USD, which it is considering past performance of INR, these companies are tactical hedge as they are positively impacted by that.


Valuation

As I mentioned earlier, most of the Companies are trading near ATH and got re-rated by market recently. PE multiple of top companies are somewhere between 30 to 40 times TTM, which is very high if we take past as benchmark.


Conclusion

To sum it up, we have dividend paying, quality companies, growing at 15-20% CAGR, have their revenue in foreign currency and are available at 30-40 times TTM earnings. Valuations are little stretched at the moment and this is very critical part as I am not a believer of BAAP (Buy At Any Price). However, this can be addressed by dollar cost averaging. I think, retail investors should have one of these IT services companies in their long term portfolio. 

Best of luck and happy investing. I hope this will help. Please share your views in comment box below.

Disclaimer - Invested in IT services companies and not a recommendation to buy or sell.


About author: 

Manish Negi is a Chartered Account and an experienced auditor. 

Twitter -  www.twitter.com/camanishnegi

Koo - www.kooapp.com/profile/camanishnegi

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