RIL vs TCS: Should you buy Reliance Industries or Tata Consultancy Services shares after a dull year?

Energy-to-telecom behemoth Reliance Industries (RIL) and IT major Tata Consultancy Services (TCS), the country’s two most significant players in terms of market capitalisation, have underperformed the benchmark equity indices BSE Sensex and NSE Nifty in the past one year. Shares of RIL declined marginally by 0.21 per cent to Rs 2,439.85 on February 17, 2023, against Rs 2,444.90 on February 17, 2022. TCS retreated 7.52 per cent to Rs 3,499.65, while the 30-share pack Sensex added 5.37 per cent during the same period.

Earlier, both of the companies have created humungous wealth for investors in the past and market watchers continued to stay bullish on Reliance Industries and Tata Consultancy Services despite the dull performance in the last 12 months. RIL surged 167 per cent in the past five years and 502 per cent in the previous 10 years. Likewise, TCS soared 138 per cent and 470 per cent in the past five years and 10 years respectively.

While sharing his views on TCS and RIL, Pankaj Pandey, Head-Research, ICICIdirect said, “We have a ‘Buy’ rating on TCS and RIL. Strong organic growth, consistent financials, industry-leading margins and a healthy capital allocation policy prompt us to be positive on TCS. In comparison, RIL’s consumer business to be the growth driver, going ahead. The O2C segment is likely to improve as higher middle distillate cracks would help strengthen GRMs along with a rebound in petchem demand. Tariff hikes undertaken by Jio would be a key monitorable.”

For nine months ended December 31, 2022, RIL reported 6.51 per cent year-on-year growth in consolidated net profit on a 31.63 per cent rise in gross sales. However, the bottom line of RIL declined nearly 15 per cent for the latest quarter ended December 31, 2022. TCS posted an 8.28 per cent YoY and 17.80 per cent YoY rise in net profit and gross sales, respectively, for the nine months ended December 31, 2022. The net profit of the company grew 11 per cent YoY in Q3FY23.

According to Nuvama Institutional Equities, TCS posted solid Q3FY23 results. The IT major is hopeful of the demand environment, although it remains cautious due to macro challenges. Deal wins have shown a stable trend and stood at $7.8 billion (down -3.7 per cent QoQ and up 2.6 per cent YoY), within the guidance range of $7-9 billion.

“We maintain a positive stance on the sector. We see strong sustainable demand (transformational/cost-takeout deals) driving revenue growth and margin tailwinds to aid higher earnings growth over the next three years. Valuation, being no longer expensive, makes the risk-reward profile attractive,” Nuvama Institutional Equities said last month while retaining a ‘Buy’ rating on TCS with a target price of Rs 4,100. Shares of TCS traded at Rs 3,491 in the morning trade on February 20.

On the other hand, Nuvama is also bullish on RIL with a target price of Rs 3,205, indicating an upside of 31 per cent from the current market price.

“Windfall tax on HSD/ATF exports shall drag earnings in the near term. RIL’s new energy rollout shall unleash its next leg of growth, besides aiding conventional business (New energy upgrade). We cut FY24 EBITDA by 2 per cent (weak near-term outlook),” Nuvama said in a report.

Nirav Karkera, Head of Research, Fisdom said, "Both Reliance and Tata Consultancy Services are strong players in respective segments and a good buy at current levels for investors. While TCS is expected to benefit from improving fundamentals of increased cost efficiency, improving order book, expanding bottom line, and growing investor interest also aided by sectoral tailwinds, the RIL conglomerate is expected to gain through fundamental strengthening of its businesses, especially renewable energy and telecommunications."

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