Best IT Stocks in India to buy in 2024

In this article, we will cover

• An overview or a snapshot of the IT sector in India
• List of the best IT stocks to buy
• Factors to consider while deciding the best IT stocks to buy
• A model portfolio - best IT stocks in the Indian market
• Video on how to analyse and pick IT stocks for Investments
• Detailed overview of the Best IT stocks to buy now in India

Best IT Sector Stocks in India - An Overview

The IT sector is one of the most crucial sectors of the Indian industry as well as one the largest drivers of export revenue for the country. The industry currently contributes to about 7.7% of GDP and is expected to contribute to about 10% by 2025. India is currently the largest IT services provider in the world. The country has an edge primarily due to the availability of highly skilled and less costly manpower available. India is the leading sourcing destination in the world, serving about 55% of the global service sourcing market of an estimated size of USD 185-190 billion and a 38% market share of the BPM sourcing market.

With the onset of COVID-19, governments across the world have restricted movement of people to avoid the spread of the virus. Due to this step, the majority of the companies have had to enable “work from home” setups for their employees so as to continue the daily operations of the company. This presented a great opportunity for IT companies as businesses across the world have been updating and developing their IT infrastructure so as to ensure seamless working among employees while maintaining constant interaction with their clients.

The pandemic has highlighted the importance of having a proper IT infrastructure to ensure efficient continuation of businesses and accelerated the push towards digitalisation across the globe for all companies ranging from small local companies to large conglomerates, who are now focusing more towards developing and upgrading their infrastructure for both consumer facing and operations related services. Along with this, a lot of IT enabled businesses have emerged during these times. This environment provides the IT industry with great business opportunities over the long term driving growth for IT companies.

As investments, IT companies are known to carry negligible to no debt on their balance sheets. They are usually asset light as no major capex is incurred due to the focus being towards providing services which enables them to generate high profitability and return ratios for investors (ROE being in the range of 20-30%) while maintaining sufficient liquidity on their books.

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Best IT Stocks to Buy in India

Best IT Stocks to Buy in India - Factors to consider while deciding

An investor should be on the lookout for certain factors which can help them identify stronger companies in the sector, such as:

• Identify the verticals and their size in the revenue of the company: IT companies service various verticals such as Banking and Financial Services, Insurance, Pharma, Communications, Media & Technology, Energy & Utilities and Manufacturing among others. The key is to find companies which are well diversified across verticals and services. Verticals which are more stable and have sound growth prospects will drive returns for the companies.
• Identify the geographic distribution of revenues: IT companies service countries across the world such as the US, Europe, Asia among others. Investors need to see the revenue share from different countries and also assess the currency exchange rate movement of India with that of the foreign currency to identify any foreign currency gains/losses which can significantly affect the earnings of the company.
• Identify the financial performance of the company: One needs to look at the performance of the company over time and against its competitors using metrics such as ROE, ROCE, P/E ratio, Cash flow from Operations and profit margin ratios among others to give an understanding about the financial position of the company and whether its financials are strong to deal with in challenging times.
• An investor also needs to assess the product offerings and the order inflow for the companies so as to ascertain the revenue flows expected for the company. Another aspect to keep an eye out for is the R&D spending of the company as technology is significantly influenced by new discoveries which can impact the business.
• IT companies are known to regularly give out dividends and conduct share buybacks as a way of giving back money to shareholders. Investors should assess the frequency and the amount of these which can also indicate stability in earnings and returns on investments. While companies conducting these activities are good for shareholders, one should assess the fact that the company maintains enough cash for expenses and inorganic and organic growth opportunities as well.

Portfolio Companies in IT Stocks in India

Tata Consultancy Services Ltd

Tata Consultancy Services Ltd is the largest IT company in India by Market cap and the world’s largest IT Services provider. The company is involved in providing a wide spectrum of services such as IT Services, Consultancy, business solutions, digital transformation, and IT products and platforms. The company is also foraying into newfound and developing technologies such as cloud-based computing, machine learning, AI and Blockchain-based technology.  As of Q2FY24, its majority revenue segment is BFSI which forms 38% of the total revenue pie for the company followed by Retail and CPG, Communications, Media and Tech, Life Sciences and Healthcare, Manufacturing, and others. TCS’ major revenue generation is from North America contributing to about 52%, UK and Europe ex-UK are around 31.3% while India is at 5%.

The company has a proven track record which is reflected in the company’s financials as it has been delivering industry leading results such as 5-year average RoE of 41%; an operating profit margin of 26%. TCS has also seen consistent growth with revenue growing at a CAGR of 13% over the last 5 years while the net profits saw a 10% CAGR for the same period.

A key risk for the company lies in the fact that the company may not be able to deliver growth at a similar pace as in the past, thereby taking away the premium valuations the stock commands and impacting the share price negatively.

Infosys Ltd

Infosys Ltd is currently the 2nd largest IT service provider in India. The company is engaged in providing a wide array of IT services to clients across the globe and across multiple verticals such as the US, Europe, Asia and the rest of the world. The company is also engaged in the development of new technologies to better service clients. The verticals it serves are BFSI, Retail & CPG, Communications, Energy & Utilities, Manufacturing and Hi-tech. The geographical breakdown spans across North America, Europe and India and the rest of the world.

. The company has delivered a strong financial performance with a 5-year average ROE 28% while managing to deliver an Operating profit margin of 24%. It has delivered a 16% CAGR growth in the top line and a 9% CAGR growth in the bottom line the last 5 years. The company currently has a P/E ratio of 22.86x, being relatively under valued among its peers. Infosys faces risks from whistle-blowers. In the past, it has been successful in allaying any concerns but multiple claims may still harm their reputation.

HCL Tech

HCL Tech is a leading global IT Services company. It is ranked among the top five Indian IT services companies in terms of revenue. The company has been focused on transformational outsourcing since its entry into the global market following its IPO in 1999. The company’s revenue grew by 13.7% in constant currency terms in FY23. The growth in IT services has been the fastest in the past five years. The company has been experiencing good demand from AWS and thus has been hiring aggressively in this segment. The company has also seen consistent growth with revenue growing at a CAGR of 15% over the last 5 years while the net profits saw an 11% CAGR for the same period. The company’s margins are improving and its growth coming in line with its top peers. The company also provides an attractive dividend yield of 3.9%. Considering the beaten-down valuations, future growth and margin expansion provide a strong case for the stock.

Larsen & Toubro Technology Services Ltd

Larsen & Toubro Technology Services Ltd is a market leader in five key segments: transportation, telecom and hi-tech, industrial products, plant engineering, and medical devices. LTTS is positioned to leverage and capitalize on the emerging opportunities arising from Electric Autonomous and Connected Vehicles, 5G, AI and Digital Products, Digital Manufacturing, Medtech and Sustainability.

The company has a robust financial profile and a debt-free balance sheet, with net cash flow of Rs. 290 crores as of March 31, 2023. During FY23, it registered revenue of Rs 80,136 million, a growth of 22% Y-o-Y, and a Net profit of Rs 11,698 million, a growth of 22% Y-o-Y. The company has a strong track record of return on equity (ROE) and return on capital employed (ROCE) with an average of 26% and 35.70% over the last 5 years.

Persistent

Persistent was able to produce 14.1% YoY growth in CC during Q2FY24. This growth was fueled by new business wins with both old and new clients. Persistent showcased several Gen AI customer stories, highlighting their expertise in generative AI technology. The order book for Q2FY24 was $479.3 million, with a new order book TCV of $313.1 million. The top 50 customers portfolio delivered 3.7% growth, better than the overall revenue growth of the company. The company's numerous long-term partnerships with well-known global brands have increased its commercial stability and offered long-term visibility. The company will be able to deliver a higher growth trajectory than its competitors thanks to a solid deal pipeline and strong revenue growth momentum in the Services vertical as well as in Allied businesses.

Best IT Stocks to buy in India - Watch our video on how to analyse and pick for Investments

Model Portfolio

In order to get an exposure to best Indian IT stocks, you would need a total of approximately ₹37,055 for the below curated portfolio as of 28th Mar 2024.

Detailed overview of the List of Best IT stocks to buy now in India 

The table below covers some of the most important factors while evaluating Best IT stocks such as the return ratios – RoE, operating margins, sales and earnings growth, market cap, etc.

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