Blasé Capital TCS Vs/= HCL
Two of the biggest India IT firms, which are believed to be the bellwether stocks in the sector, announced similar financial results for the third quarter of this fiscal year. In both cases, while the revenues were up by a smaller percentage, the profits were down quite substantially. In both cases, the stocks heaved wildly. HCL Tech nosedived by nearly INR 60 during intraday trading yesterday, it recovered by INR 35 to close at INR 1664. On an overall basis, the share price was down 0.22 per cent. TCS was up 0.72 per cent, and closed at INR 3,263. Over the past five days, both the stocks have gyrated wildly. While HCL yesterday was between its 52-week and low, TCS was more than INR 1,000 lower than its 52-week high of more than INR 4,300. The similarities and differences are interesting.
For the investors, the two results were revealing. The first was that despite a year of roller-coaster policy changes in the US related to immigration, visas for techies, and other issues, the quarterly revenues were up for both the firms. The North American market stayed stable, and more projects were bagged in other geographies. Both firms maintained that they had a buoyant pipeline of future projects. In fact, both gave indications that the next few quarters will be fine as far as the toplines are concerned. More importantly, TCS claimed that its transition to AI-driven projects was going as per plan, and revenues from them were on the increase. This implies that the big Indian IT firms are embracing AI more efficiently, and effectively. They are positioned well to bag more AI-related projects in the future, which will enable them to further improve the toplines.
Net profits were down by more than double digits (percentage-wise) for both TCS and HCL. This was a dampener for the investors, as the experts had estimated higher net profits, both year-on-year, and sequentially. TCS said that one of the prime reasons for the decline was one-time adjustments due to the new labour codes. Since they forced the firms to pay higher benefits to the employees, including gratuity, TCS made a one-time adjustment, which cost INR 2,000 crore. This depressed the net profits. For the investors, this bad news felt good. It meant that the costs will not recur in the future quarters. In addition, the operating margins were up, which implied that there were chances of the firms earning higher net profits in the future. Thus, the lower-than-expected net profits turned into a positive cue. This explains why the TCS stock went up the day after it announced the third quarter financial results, and HCL did not suffer much.
Both firms announced attractive dividends in the third quarter; the dividends were more than INR 10 per share in both the cases. In addition, TCS came up with a massive special dividend that was almost three times as high as the interim one. This excited the investors, who realised that the firm was willing to reward them handsomely. It was an indicator that the future was bright, which was why the company was happy to announce such a huge dividend. This was despite the headwinds, and the pressures on costs, revenues, and operations in the US due to policy disruptions. In any case, several analysts feel that the IT stocks are ready for re-ratings, after 2025 proved to be a dismal year for them. Last year, IT stocks took a severe beating, and underperformed the indices. As stated earlier, the 52-week high for TCS was more than INR 1,000 higher.
TCS’ dividend history is quite attractive, although historically it wavered based on earnings and performances. In FY-25, it was INR 126 per share, which was higher than INR 73 in FY-24. In FY-23, the figure was INR 115 per share, which was much higher than those in FY-22 (INR 43), and FY-21 (INR 52). One of the main reasons for the extra-high dividend payouts is that the majority owner of the firm is Tata Sons, the holding company for the Tata Group. Since Tata Sons is majority owned by Tata Trusts, the latter require handsome dividends from the parent to fund their charities and welfare activities. TCS is one of chief contributors to the kitty of Tata Sons, thanks to the former’s high profitability and margins. The onus is usually on TCS to energise the trusts, whose ability to take on projects largely depends on the tech giant’s dividends to Tata Sons.
Of the two firms, TCS and HCL, analysts seem to prefer the latter. A major analyst firm stated that TCS delivered largely-in-line revenues with muted margin performance, and limited evidence of meaningful pick-up in global growth. Productivity gains were helpful in efficiency but are expected to temper. HCL, stated another analyst firm, gave more resilient numbers, better-than-expected revenues, and margin outcomes, supported by new deals, and expanding AI-linked incomes. Hence, there is an expectation that HCL is likely to deliver the highest recurring EPS compounded annual growth among the top five IT firms in the country. One will, however, need to wait for the quarterly results of another bellwether firm, Infosys.
