Best IT Stocks for Investment in India

22 Feb 2021by Pradeep U

Best IT Stocks for Investment in India

A recent wealth creation study has termed the stock of IT giant Infosys, the fastest wealth creator in India, as the stock multiplied a staggering 688 times in the last 25 years. Profits of the company which stood at Rs 13 crore in 1995 grew at an astonishing CAGR of 33 percent to touch Rs 16,450 crore in the year 2020. No wonder the stock of Infosys has created phenomenal wealth for investors.

But is Infosys stock the only outperformer stock from the IT pack when it comes to creating fortunes for patient investors. Well, the answer is no.

IT giants like TCS, HCL Tech, Wipro, and Tech Mahindra have also created multi-generational wealth

Check out the below table:

Company name

Share price on 1st Feb 2011

Current share price

19th Feb 2021

Gain

TCS

456

3072

6x

HCL Tech

94

950

10x

Wipro

148

430

3x

Tech Mahindra

138

994

7x

 

In the above table, we can see that how the top IT players in the country have generated over 3-10x returns over a 10-year period. If we factor in the bonus shares issued by these companies and the dividends too, the gains would be much higher.

In one of our earlier articles, we had taken a detailed look at how paint stocks have been the best wealth compounders. You can check it out here.

In this article let’s take a look at the best IT stocks for investment in India.

A brief overview of the IT sector in India

India ranks as a global leader in the IT sector with an estimated domestic revenue of US$ 44 billion and export revenue of US$ 147 billion in FY20. Last year, India’s IT sector contributed around 7.7% to the country’s GDP and the current year's contribution is estimated to increase to 10% by 2025.

India is also one of the most preferred offshoring destinations for IT companies across the world. With a successful track record and capabilities in delivering both on-shore and off-shore services to global clients, Indian IT companies have given a tough competition to foreign IT companies. The IT industry in India is expected to touch US$ 350 billion by 2025.

IT sector has not only contributed immensely in making India a preferred destination for investment destinations among global investors but also created huge employment opportunities domestically, as well as in America, Europe, and several other countries.

Government initiatives to boost India’s IT sector

Set up of national-level program under the NITI Aayog to enable efforts in Artificial Intelligence (AI) and leverage it as part of Budget 2019.

Passage of the National Policy on Software Products-2019 for developing the country as a software product nation.

Release of “Simplified Other Service Provider” (OSP) guidelines to improve the ease of doing business in the IT Industry in 2020

Recognition of Information Technology as one of 12 champion service sectors and setting up a fund of Rs. 5,000 crores for realizing the potential of these champion service sectors.

Top 20 IT companies in India in terms of market capitalization

Company Name

Market capitalization (in Rs. Cr.)

TCS

1,152,770.11

Infosys

550,100.64

HCL Tech

257,798.18

Wipro

235,531.97

Tech Mahindra

96,223.06

L&T Infotech

66,867.71

MphasiS

31,520.00

Mindtree

27,798.11

Oracle Fin Serv

26,252.28

COFORGE LTD.

15,551.29

Affle India

13,479.80

Persistent

12,771.76

Route

10,692.52

Happiest Minds

7,895.38

Birlasoft

6,604.95

Cyient

6,553.73

Intellect Design

5,765.11

Zensar Tech

5,692.13

Sonata

4,197.43

KPIT Tech

3,659.82

 

Key pointers to consider while choosing the best IT stocks for investment

Stocks like TCS, Infosys, HCL Tech, and Wipro have generated multibagger returns for investors. However past performance can never be considered as the only reason to invest. There may be other IT stocks available at cheaper valuations currently with the potential to become the next TCS or Infosys.

Some important factors which can help you choose the best IT stocks for investment include:

Diversified verticals and client base

IT companies cater to clients from diverse fields such as Pharma, Aviation, Communications, Manufacturing, Insurance, Banking, and Financial Services, Media, etc. Any IT company which caters to multiple verticals will be isolated from threats of a slowdown in one industry. With diversified revenue streams such companies can withstand economic downturns to a large extent.

Financial performance of the company

While investing in any company, it is important to check the consistency of its key parameters like revenue and profits over a long-term period of at least 5 years or more. It is equally important to check various financial ratios like ROCE, ROE and the debt to equity ratio.

Management of the company

Companies like Wipro and Infosys are well-known for their high standards of corporate governance. A visionary and transparent management that follows ethical business practices can take the business to new heights of success. On the contrary, inefficient and unethical management hides vital information from the public domain and its shareholders can ruin an established business.

Innovation

The latest trends in the IT space include Artificial Intelligence (AI), blockchain, self-driving technologies, and the Internet of Things (IoT).

Whether it is the IT sector or any industry, companies that fail to innovate constantly are at risk of losing out to competitors and becoming obsolete. Remember the failure of Nokia after Microsoft acquired the company and launched it with Windows OS even as other handset manufacturers were moving towards Android OS.

Key takeaways

IT stocks offer a lot of wealth creation opportunities to investors. However, quick technological changes can pose some serious risks even to the most established players.

Established companies in the IT sector in India who have entered into long-term agreements with their clients have recurring and stable revenue streams. Many such companies will continue to create investor wealth like in the past, albeit at a slower pace. Stocks of IT companies that focus on the latest technology trends like Artificial Intelligence (AI), blockchain, and self-driving technologies are likely to emerge as the biggest wealth creators in the next few decades.

To help you create phenomenal wealth, our team of research experts have identified a set of mulitbaggers stocks from multiple sectors. These high growth stocks have the potential to generate returns like Infosys and Wipro in the long term. Click here to invest in them.

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