TCS vs Tata Elxsi: Which Tata Group IT stock should you pick for long term?

While the IT sector has lagged behind the Nifty in 2024, it has started showing signs of recovery recently. The Nifty IT index has increased by 10 percent year-to-date in 2024, compared to an over 12 percent rise in the benchmark Nifty. However, over the past year, the IT index has outperformed the Nifty, advancing by over 26 percent, while the Nifty has risen by 24 percent.

In the June quarter (Q1FY25), the IT sector experienced a broad-based recovery across major verticals and geographies, indicating continued strong performance for the rest of the year. However, with optimism already reflected in current valuations; experts believe there is limited room for further gains.

"Q1 saw a rebound in operating performance after two consecutive quarters of weak topline growth. Although growth was partly aided by quarterly seasonality, the underlying demand has also been constructive across verticals and geographies," noted brokerage house Prabhudas Lilladher.

Given this backdrop, long-term investors face a crucial decision: which Tata Group IT stock is the better choice, Tata Consultancy Services (TCS) or Tata Elxsi? Let's explore.

Stock Price Trend

TCS has outperformed Tata Elxsi so far this year, rising over 12 percent year-to-date in 2024, while Tata Elxsi has declined by 22 percent during the same period.

TCS has delivered positive returns in four of the eight months this year, whereas Tata Elxsi has been in the green in just two months.

TCS experienced a 3.3 percent decline in August after a strong rally of 12.3 percent in July and a 6.3 percent gain in June. Before this, the stock faced a downturn for three consecutive months, dropping 3.9 percent in May, 1.44 percent in April, and 5.3 percent in March. Earlier in the year, TCS saw a 7.6 percent surge in February but remained relatively flat in January, with only a 0.7 percent increase.

In contrast, Tata Elxsi fell by 2 percent in August following a 0.24 percent decline in July. The stock was up 1.1 percent in June after three months of losses, dropping 2 percent in May, 9.4 percent in April, and 0.3 percent in March. The stock saw a slight recovery in February, rising by 2.74 percent, but suffered a significant 13 percent drop in January 2024.

Over the past year, TCS has outperformed Tata Elxsi, rising 21 percent, while Tata Elxsi declined by nearly 5 percent.

Driven by strong market sentiment and investor confidence, TCS reached new highs last month. It hit a record high of ₹4,431.25 on July 29, 2024, and a 52-week low of ₹3,313.00 on November 11, 2023. Currently trading at ₹4,170.90, TCS is just 6 percent away from its peak and has surged over 26 percent from its yearly low.

Meanwhile, Tata Elxsi reached its 52-week high of ₹9,191.10 on December 18, 2023. Now trading at ₹6,819.65, the stock has dropped almost 26 percent from that peak. However, it has advanced 6.5 percent from its 52-week low of ₹6,406.60, hit on June 4, 2024.

Looking at the longer term, over the past three years, Tata Elxsi has been the better performer, soaring 61 percent, while TCS has gained just 27 percent.

Earnings

In the June quarter of FY25, TCS demonstrated solid growth, reporting an 8.72 percent year-on-year (YoY) increase in net profit, reaching ₹12,040 crore, compared to ₹11,074 crore in the previous year. The company's total revenue for the quarter was ₹62,613 crore, reflecting a 5.4 percent YoY growth from ₹59,381 crore in Q1FY24, and a sequential increase of 2.2 percent. In constant currency terms, TCS's revenue grew by 4.4 percent YoY. Operating margins also improved, rising by 1.5 percent YoY to 24.7 percent in Q1FY25.

Samir Seksaria, TCS's Chief Financial Officer, commented, “Despite the typical impact of annual wage increments this quarter, we have delivered strong operating margin performance, validating our efforts towards operational excellence. We remain focused on making the right investments in R&I and talent, strengthening our superior return ratios, and creating long-term value for our stakeholders.”

Conversely, Tata Elxsi reported a 3 percent YoY decline in net profit for the first quarter ending June 30, 2024, at ₹184.1 crore, down from ₹189 crore in the same period last year. Sequentially, the net profit decreased by 6.5 percent from ₹196.9 crore in the March 2024 quarter, while revenue rose by 2.3 percent. Tata Elxsi's revenue from operations grew by 9 percent to ₹926.5 crore, up from ₹850 crore in the corresponding period of the previous fiscal year.

Manoj Raghavan, CEO and Managing Director of Tata Elxsi, stated, "We are pleased to report a healthy performance in the first quarter with a top-line growth of 2.3 percent quarter-on-quarter and 9 percent year-on-year. Our healthcare & lifesciences business saw a decline in topline by 4.3 percent QoQ in constant currency, mainly due to delays in the renewal of some projects with one of our large customers."

Between TCS and Tata Elxsi, which Tata Group IT stock should you pick for long term?

Investors seeking long-term opportunities in the IT sector are often drawn to the Tata Group's prominent players: Tata Consultancy Services (TCS) and Tata Elxsi. While both stocks have their unique strengths, industry experts have varied opinions on which one holds more promise for the future. Here's what they say -

Varun Saboo, Head - Equities, Anand Rathi Shares and Stock Brokers, prefers Tata Elxsi over TCS.

We from current levels like both the names. However, if one has to be chosen we would go with Tata Elxsi. Out of their 3 segments of Auto, Pharma, Telecom… only Auto was doing well. However, things should pick up in the near term as per management commentary in recent times. Hence we believe Tata Elxsi could outperform going forward.

Aditya Agarwal, Head Derivatives & Technical at Sanctum Wealth, also likes Tata Elxsi better.

It would be wise not to compare these two companies, as they differ in their offerings and scale of operations. Overall, given that the runway for growth for ER&D companies (like Tata Elxsi, which focuses on the auto/transport vertical) is long, Tata Elxsi would deliver better returns over the long run (3-5 years) as the product development cycle accelerates.

On the other hand, TCS has a leadership position among large-cap IT services companies and is best placed to tackle the current weakness in the spending environment compared to its peers. TCS will likely deliver better returns than Tata Elxsi over the next year as valuations are far too stretched for Tata Elxsi, and TCS is witnessing a revival in BFSI after four consecutive quarters of sequential decline.

On the contrary, Omkar Tanksale, Senior Research Analyst – IT, Axis Securities, favours TCS over Tata Elxsi.

We believe TCS is a safer bet compared to Tata Elxsi because TCS has a robust deal pipeline with better execution capabilities, higher return ratios, and better profit margins. TCS also has a more diversified service portfolio compared to Tata Elxsi, which provides more resilience to the business. The valuation of TCS also indicates better upside potential compared to Tata Elxsi.

Ultimately, the choice between TCS and Tata Elxsi depends on the investor's risk tolerance and investment horizon. Tata Elxsi is seen as a growth-oriented pick, with strong potential in the automotive and telecom sectors. In contrast, TCS offers stability, a diversified service portfolio, and a strong position in the IT services industry, making it a safer choice for those seeking steady returns. As always, investors should consider their individual goals and conduct thorough research before making a decision.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.