How to analyse IT services stocks
Indian IT services companies earn most of their revenue from clients abroad, mainly in the US and Europe, and pay most of their costs in rupees to employees in India. So their profit depends on winning new work, keeping people, and the exchange rate. They usually carry little debt and produce a lot of cash.
The numbers that matter
| Metric | What it tells you | What healthy looks like |
|---|---|---|
| Constant-currency revenue growth | Revenue growth with the effect of currency moves removed, so you see real business growth. | Steady growth in line with or above peers; it is a cleaner signal than rupee revenue growth. |
| Deal wins (TCV) | Total contract value of new deals signed in a period. It hints at future revenue. | Healthy and consistent deal wins across quarters, not one large deal hiding a weak pipeline. |
| Operating (EBIT) margin | Profit from operations before interest and tax, as a share of revenue. | Stable within a narrow band over years; sharp swings point to pricing or cost trouble. |
| Attrition | The share of employees who leave in a year. | Moderate and stable; a sudden spike raises hiring and training costs. |
| Client concentration | How much revenue comes from the top 5 or top 10 clients. | No single client so large that losing it would hurt badly. |
| Cash conversion | Operating cash flow compared with net profit. | Close to or above 100% over a few years, with steady dividends or buybacks. |
What drives profit
Employees are the biggest cost. Revenue depends on how many people are billed to clients and at what rate. Utilisation is the share of employees working on paid projects. Higher utilisation lifts margins, but too high means no spare people for new work.
Wage hikes, visa costs and the shift to more fixed-price contracts all move margins. Fixed-price deals can be more profitable, but the company bears the risk if the work takes longer.
The rupee effect
Say a company bills a client $1 million. At ₹80 to the dollar that is ₹8 crore; at ₹84 it is ₹8.4 crore, with almost the same costs. A weaker rupee helps reported numbers, and a stronger rupee hurts. That is why companies also report growth in constant currency, which strips out the rupee move.
Most large IT firms hedge part of their currency exposure, so the effect is smoother than the raw rate move.
Why generic rules can mislead
IT companies have little debt and few factories, so their ROE and ROCE are often high. That is normal for this business and does not alone make one company better than another. Compare IT firms with each other on growth, margins and deal wins.
Their clients cut spending when their own economies slow, so IT growth can slow sharply even when nothing is wrong inside the company.
Red flags
- One or two clients making up a large and growing share of revenue.
- Revenue growth propped up only by currency gains, with weak constant-currency growth.
- Margins falling several quarters in a row without a clear reason.
- Attrition rising sharply while peers stay stable.
- Receivable days climbing, meaning clients are paying more slowly.
Common beginner mistakes
- Reading rupee revenue growth without checking constant-currency growth.
- Treating one large deal win as proof of lasting growth.
- Ignoring that client budgets abroad, not Indian demand, drive this sector.
Common questions
How does the rupee affect IT stocks?
IT firms earn mostly in dollars and euros but spend mostly in rupees. A weaker rupee usually lifts their reported revenue and margins, and a stronger rupee does the opposite.
What is constant currency growth?
It is revenue growth calculated as if exchange rates had not changed. It shows how much the business really grew, separate from currency moves.
Why is attrition important for IT companies?
People are the product in IT services. High attrition means more spending on hiring and training, and it can delay client projects.
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