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Sunday, April 7, 2013

Top 4 Largecap IT Stocks!

Question: Can you please cover some Large-Cap IT stocks which will make good profits over the next 3-6 months.

Answer: 

IT Industry in India has grown by leaps and bounds, from the proverbial small start it had when Indian government imported some mainframe computers from Soviet Union. Another significant event occurred In 1981 when a small group of seven engineers led by Mr. Murthy co-founded the firm Infosys with a small corpus of Rs 10,000, which went on to change the face of modern India.

The IT industry of today has both IT and BPO component as an integrated aspect of its service offerings. IT sector has increased its contribution to India's GDP from 1.2% in FY1998 to a whopping 7.5% in FY2012. The sector achieved another landmark when the sector aggregated a annual revenue base of over US$100 billion in FY2012, which had an export share of US$69.1 billion and domestic share at US$31.7 billion respectively. Exports thus truly dominate the IT industry, and constitute about 77% of the total industry revenue. Top Four Listed Indian IT Services Providers are Tata Consultancy Services, Infosys, Wipro and HCL Technologies.

The top four companies stack as below, in terms of revenues and manpower:

Firm Revenues Employees Fiscal Year

TCS $10.17 billion 254,076 2012

Wipro $7.30 billion 140,569 2012

Infosys $7.00 billion 153,761 2012

HCL Tech $4.3 billion 85,335 2012

Tata Consultancy Services

Tata Consultancy Services or TCS, as it is popularly know, is the oldest and largest Indian IT firm. Known for its largest manpower base and aggressive pricing skills, TCS is a large global and domestic business player. TCS is a crown jewel in Tata group, and its success, growth and cash-flows enable the Tata group to take large bets in other businesses as well.

TCS was founded as early as 1968 and were in pioneer in many ways, however in terms of timing of market listing, they were the last of the top four to approach capital markets in 2004. In 2011, the firm was the first IT firm to achieve annual revenues north of USD 10 Billion.

Fundamentally speaking, TCS has grown exponentially in the last five years, with topline growing from Rs 18,533 crores in year 2008 to Rs 38,858 crores in year 2012. Net profits have grown from Rs 4508 crores in same duration to Rs 10,975 crores.

If one looks at Promoter Shareholding, promoters own about 73.96% of TCS stock, which is one of the highest ownership for any top IT firm. General public owns less than 5% and FIIs own about 15% of TCS stock. Less general public holding and high promoter is sign of a robust firm with good demand-supply equation in Stock Markets.

Firm has been consistent dividend payer and has paid dividend on each quarterly basis. Total dividend in year 2012 was 2500%, which included the special one-time dividend of 1600% declared in Apr, 2012. Like any other top IT firm, TCS is debt-free and unlike other Tata companies, it has a clean and strong balance sheet with great cash-flows, which often support other Tata firms to take aggressive global bets.

Wipro

Wipro is known as the Soap to Software giant and was incorporated by Mr Azim Premji’s father in 1945 to manufacture Ghee, Vanaspati oil and Refined Oils. Mr Azim Premji diversified Wipro to several new sectors such as PC Hardware and Software services in 1980s.

Wipro adopts a String of Pearl strategy for acquisitions, where it buys several small companies with niche skills and customers and integrated them with parent firm. The firm has several business units such as Wipro IT, which is the global IT services arm of Wipro, Wipro consumer and lighting, which is the FMCG segment of Wipro, Wipro Infrastructure engineering, which is hydraulics business division and Wipro GE medical systems, which is the joint venture with GE healthcare.

Fundamentally speaking, Wipro’s revenues have grown from Rs 17,461 crores in year 2008 to Rs 32,053 crores in year 2012. Net profits have grown less aggressively from Rs 3063 crores to Rs 4685 crores in same timeframe.

Promoter shareholding in Wipro is the highest among all top IT firms with promoters holding about 78.29% share in the firm and general public holding as low as 5.35% and FIIs holding a small share of 7% respectively.

Firm has been regular dividend payer with dividend payout at 300% of face value in year 2012. Book value of the firm stands at 99 Rs per share in year 2012 and PE ratio is at 23.86 currently. On charts, Wipro had a double bottom around Rs 330-340 in mid year 2012, which was a good entry point to take a position in the stock. Wait for dips and accumulate can be a good strategy in this stock currently.

Infosys Technologies

Infosys is the original rock-star of Indian IT industry and has many firsts to its credit. It is the first firm which placed transparency and honesty ahead of profits and revenue share. It is the first firm which offered stock options to its employees to share wealth with employees and created millionaires of several initial employees. Infosys is also an example of professionally run organization with promoters holding a relatively small share of stock, and most of the ownership now resides with FII, thus firm truly belongs to investors in that sense.

Fundamentally speaking, Infosys is another well performing firm with revenues almost doubling from year 2008 topline of Rs 15,648 crores to year 2012 topline of Rs 31,254 crores. Net profits have also improved from Rs 4470 crores in 2008 to Rs 8470 crores in year 2012.

Infosys has the cleanest balance sheet with no debt or loans whatsoever. Promoter shareholding is low at 16.04% and FIIs are the top business owners at 40.55%. General public has good stake in the firm at 12.51% as well.

Firm is regular dividend paying and paid a total of 940% dividend in year 2012. Book value of the stock is at Rs 518 per share in 2012 and PE ratio is reasonable at 19.41. It’s a good stock to buy on dips and accumulate for medium to long term investing.

HCL Technologies

HCL Technologies is one of the India’s own garage startup IT company which went on to become top four IT services firm in India. HCL Enterprises was found in 1976 and HCL Technologies was spun off in 1991 to focus on the growing IT services segment. HCL has good presence in IT applications, IT infrastructure management, business process outsourcing, and product engineering businesses.

Fundamentally speaking, topline for HCL has grown from Rs 4615 crores in 2008 to Rs 8907 crores in 2012 with profits growing from 780 crores in 2008 to Rs 1950 crores in 2012. EPS has more than doubled in same duration from Rs 11.72 per share in 2008 to Rs 28.13 per share in 2012.

Indian promoters have shareholding of 44.92% in HCL Tech, with foreign promoters holding about 17.21% and FIIs holding about 21.80%. Firm has paid total dividend of 500% on face value in year 2012 itself. Book Value per share is Rs 95 per share and PE ratio is on the higher side at 26.92 for the firm.

The stock has seen steady growth in past one year and is a good momentum trading stock to buy on dips and sell on rallies. Stock can be accumulated on dips considering decent performance of firm in recent years.

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