Indian tech stocks: Booming businesses to watch in 2022 and beyond
Indian tech stocks witnessed a sharp sell-off earlier this year, due to weak global market cues, surging market volatility, and overvaluation concerns. The benchmark Nifty IT index plunged 7.25% year-to-date, after gaining 59.6% in 2021. Moreover, the increased geopolitical tensions and macroeconomic headwinds such as continued supply chain disruptions and semiconductor shortage caused the tech sector to be the worst hit in the market correction in the first quarter of 2022.
Nonetheless, the tech sector has been making a stellar comeback, as evident from the Nifty IT index’s 5.03% gains over the past month. So when considering Indian stocks to buy, it might be worth considering some of the most robust Indian tech stocks.
Why the Indian technology sector? Well, technology stocks have the ability to outperform the broader markets due to their asset-light business model and high operating leverage. In addition, enterprises across sectors use technology products, providing them access to rapidly expanding addressable markets.
Further, as fixed costs and capital expenditures are significantly lower for technology companies than those in the real estate or energy sectors, a small uptick in top-line may result in a rapid expansion of profit margins. This is should allow fundamentally-sound tech companies to accelerate their growth in 2022, despite the hawkish backdrop, with majority of the central banks around the world hiking key interest rates.
Here, we take a look at five quality Indian tech stocks that should be on your radar when considering the make-up of your global equities portfolio in 2022 and beyond.
Tata Consultancy Services (NSE: TCS)
The largest Indian company in terms of market cap, TCS provides information technology and IT enabled services. It operates through multiple business segments that include banking, financial services and insurance, manufacturing, retail & consumer business, communication, and media & technology.
TCS has a history of outperforming the benchmark indices. Over the past three years, the stock surged 83.3%, beating the Nifty 50 index’s 52.75% gains. The stock also outperformed Sensex’s 53.52% gains over this period. It has in fact returned close to 3,000% since its IPO back in Aug. 2004. So, if you invested Rs. 1,00,000 in TCS stock during its IPO, your returns would stand at Rs. 30,00,000 today.TCS offers cognitive business, consulting, analytics, automation and artificial intelligence, internet of things, cloud applications, blockchain, cyber security and several other services.
The tech-giant is poised to benefit from rising enterprise spending given the acceleration towards digital transformation projects all around the globe. TCS enjoys a full-service model, an expanding client base, a strong domain expertise and a track record of solid execution.
Despite supply-side challenges, TCS’ revenues increased 4.6% year-over-year to Rs. 164,177 crore in fiscal 2021. Net profit improved marginally year-over-year to Rs. 32,562 crore, while EPS grew 0.6% from the same period last year to Rs. 86.71. Also, the company’s ROE increased 234 basis points from the pre-pandemic levels to 37.52%, driven by robust top-line growth and exceptional talent management policies.
Infosys (NSE: INFY)
Another stalwart of the Indian technology industry, Infosys provides IT consulting and software services. These include ebusiness, program management as well as supply chain solutions among others. Infosys’ services are spread across application development, product co-development, as well as system implementation and engineering.
Analysts expect significant growth opportunities in the digital vertical to drive Infosys’ performance going forward. In the June quarter, Infosys won 22 large deals worth $2.6 billion. As a result, it increased its fiscal 2022 revenue guidance to between 14% and 16%, up from between 12% and 14% while operating margin estimates remained strong at between 22% and 24%.
Infosys CEO and MD Salil Parekh said, “Our strong performance and market share gains are a testament to the enormous confidence our clients have in us to help them in their digital transformation. This stems from four years of sustained strategic focus on areas of relevance for our clients in digital and cloud, continued re-skilling of our people, and deep relationships of trust that our clients have with us.”
In the third quarter of fiscal 2022 (ended December 2021), Infosys’ net profit rose by nearly 12% year over year to Rs. 5,809 crore. Revenue from operations increased 22.91% from the prior year quarter to Rs. 31,867 crore, due to strong growth across business segments. Also, the company won several large deals during the quarter, with its total contract value amounting to $2.53 billion.
Following the impressive Q3 performance, Infosys upgraded its revenue guidance from 16.5%-17.5% (in constant currency) to 19.5%-20% for fiscal 2022, ended March. As large companies keep investing heavily to digitize their operations, the healthy technology spending is expected to drive Infosys’ growth in the current year.
HCL Technologies (NSE: HCLTECH)
The third stock on my list is HCL Technologies which has returned 114.22% in the past three years and is up over 900% since its IPO in early 2000. HCL reported positive revenue growth consecutively over the last four quarters. Moreover, the company’s annual revenues stood at Rs. 75,379 crore as of 2021, compared to Rs. 70,676 crore in fiscal 2020. In addition, HCL’s book value per share rose 16.84% year-over-year to Rs. 221.30.
Analysts expect HCL’s financials accelerate further in 2022, due to higher demand for its cloud solutions, record bookings and a strong deal pipeline. Further, HCL’s ERS segment is well-positioned to outpace the company’s IT business this year due to higher demand for digital engineering, deal wins as well as recovery in capital-intensive sectors.
HCL has continued to invest aggressively in digital offering capabilities, which will help it report strong revenue growth in the upcoming quarters. These investments were targeted towards the acquisition of IP products, which has helped HCL diversify towards high-margin revenue streams. The company continues to gain traction in the cloud infrastructure vertical as well.
HCL should continue to sustain its margin performance despite investments in geo expansion and supply-side challenges. This is due to the company’s revenue growth, higher offshoring, and expansion into smaller tier cities.
Tech Mahindra (NSE: TECHM)
The final stock on my list is Tech Mahindra, which has returned more than 226% to investors since April 2017. As one of the best IT performing stocks, TECHM rallied 47.21% over the past year. This company serves more than 1,000 clients in 90 countries, and its telecom business accounts for 40% of total sales. It also provides services to verticals such as banking and insurance, manufacturing, and retail. In the last five years, Tech Mahindra has grown sales at an annual rate of 5.6%.
Similar to peers, Tech Mahindra should also benefit from improved digital demand, revenue growth, and a healthy capital allocation program. Further, its deal wins, improving traction in the telecom segment due to legacy modernization, 5G, automation and cloud should drive revenue higher in fiscal 2022 and beyond. In fact, analysts expect Tech Mahindra sales to rise at an annual rate of 12% between 2021 and 2023.
At the end of Q1 of fiscal 2022, its client base that generates over $1 million in annual sales rose to 793 from 765 in the year-ago period. Moreover, Tech Mahindra’s profit after tax rose 9.79% year-over-year to Rs. 4,428 crore in fiscal 2021, thanks to the robust top-line growth and declining operating expenses.
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