Indian tech stocks: Booming businesses to watch in 2022 and beyond
Throughout 2021, Indian stocks have been among the best performing in the world. 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.
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)
While the Nifty 50 Index has more than doubled investor returns in the last five years, Tata Consultancy Services is up 215% in 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.
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 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 remains on track to sustain an EBIT margin of 26% in fiscal 2021 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.
In the first quarter of fiscal 2022, Infosys sales rose by 18% year over year due to strong growth across business segments. Comparatively, EBITDA rose by 21.4% year over year due to increase in sales and a fall in employee expense. The company’s EBITDA margin in fact expanded by 70 basis points to 26.6%. Its profit after tax surged by 22.7% while free cash flow grew 15.2% year over year.
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%.
HCL Technologies (NSE: HCLTECH)
The third stock on my list is HCL Technologies which has returned 216% in the last five years and is up over 900% since its IPO in early 2000. After a tepid performance in the last two quarters, HCL expects top-line to accelerate in the fiscal second quarter of 2022 (ending in September) 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.
Wipro (NSE: WIPRO)
Another well-known brand in the Indian IT sector, Wipro, has delivered 256% to investors in cumulative returns in the last five years. In the fiscal first quarter of 2022, its IT services rose 12.2% sequentially to $2.41 billion, surpassing estimates by 200 basis points.
Wipro’s management expects revenue to grow by 5% and 7% quarter over quarter in Q2, which will result in a year over year revenue expansion of 22%. In the June quarter, Wipro closed eight large deals with a total contract value of $715 million. The company’s TCV metrics were lower in the last two quarters due to the absence of large deals.
Wipro is confident of a strong demand environment to improve its deal pipeline in the following quarters.
The IT heavyweight reported an EBIT margin of 18.4% in Q1 and is forecast to range between 17% and 17.5% in fiscal 2022. The EBIT margin will reflect a year over year decline of 200 basis points due to the impact of wage hikes, talent retention costs and acquisition-related charges, which will be offset by offshoring as well as operating leverage.
Tech Mahindra (NSE: TECHM)
The final stock on my list is Tech Mahindra, which has returned 226% to investors since October 2016. 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.
If you like any other Indian tech stocks or have suggestions about Indian stocks to buy for 2022 and beyond, leave a comment below.
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