TCS kicked off the earning seasons today.
A data-thread on 10 things to check when analyzing an IT company🧵
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A data-thread on 10 things to check when analyzing an IT company🧵
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#1 Scale and growth:
Global players outsource to Indian IT cos. to get quality service at a lower cost.
With scale, companies are able to bid for larger projects and provide flexibility to clients.
Here are the largest Indian IT companies and 3 year annualized growth.
#1 Scale and growth:
Global players outsource to Indian IT cos. to get quality service at a lower cost.
With scale, companies are able to bid for larger projects and provide flexibility to clients.
Here are the largest Indian IT companies and 3 year annualized growth.
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#2: Operating margins: The key expenses for IT cos are:
a. Employee cost: This is the main cost and can be 50-70% of revenue. This depends on onsite: offshore mix.
b. Travel and marketing costs
c. Overheads and admin costs.
IT companies aspire to achieve 20% margins. List:
#2: Operating margins: The key expenses for IT cos are:
a. Employee cost: This is the main cost and can be 50-70% of revenue. This depends on onsite: offshore mix.
b. Travel and marketing costs
c. Overheads and admin costs.
IT companies aspire to achieve 20% margins. List:
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#3: Onsite and offshore mix:
Onsite is when services are delivered by co. resources at client site. Offshore is when delivered from own location.
While Billing rates are higher for onsite work, margins are higher for offshore. The mix improves for long time engagements.
#3: Onsite and offshore mix:
Onsite is when services are delivered by co. resources at client site. Offshore is when delivered from own location.
While Billing rates are higher for onsite work, margins are higher for offshore. The mix improves for long time engagements.
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#4: Vertical mix:
It tells the revenue mix for IT company from end-use industry. Eg: TCS results today show:
- BFSI and Retail contribute to 47% revenues
- Retail and Life Sciences grew the highest
Note: You should always know Top 3 verticals for any IT company of interest.
#4: Vertical mix:
It tells the revenue mix for IT company from end-use industry. Eg: TCS results today show:
- BFSI and Retail contribute to 47% revenues
- Retail and Life Sciences grew the highest
Note: You should always know Top 3 verticals for any IT company of interest.
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#5 Trend of clients concentration:
IT cos. report count of clients by size buckets each quarter. Check if a co. has large clients, compare with peers and see trend of addition. This tells future growth potential.
Eg: Here is clients concentration mix of TCS post Q3 results:
#5 Trend of clients concentration:
IT cos. report count of clients by size buckets each quarter. Check if a co. has large clients, compare with peers and see trend of addition. This tells future growth potential.
Eg: Here is clients concentration mix of TCS post Q3 results:
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#6: Revenue per employee (RPE):
A proxy metric to understand the nature of service of an IT company. HCL Tech has higher RPE than Tech Mahindra. Firstsource has low RPE as it does BPO/ KPO work.
Note: Compute trend of RPE for last 5 years - improving is always a good sign.
#6: Revenue per employee (RPE):
A proxy metric to understand the nature of service of an IT company. HCL Tech has higher RPE than Tech Mahindra. Firstsource has low RPE as it does BPO/ KPO work.
Note: Compute trend of RPE for last 5 years - improving is always a good sign.
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#7: Resource utilisation
- Higher Utilisation = Lower bench staff
- Avg. utilisation for Indian IT is 80% levels.
- High utilisation leads to better margins
- Lower utilisation (eg: Wipro, Mastek) can be great if company has orderbook as it leads to margin expansion.
List:
#7: Resource utilisation
- Higher Utilisation = Lower bench staff
- Avg. utilisation for Indian IT is 80% levels.
- High utilisation leads to better margins
- Lower utilisation (eg: Wipro, Mastek) can be great if company has orderbook as it leads to margin expansion.
List:
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#8: Employee base and attrition
Employees are backbone of an IT co. and recurring attrition is a challenge as it delays client projects. Also there is high cost in training an upskilling.
Attrition has been high in 20%+ range for Indian IT. TCS at 22% is relatively better.
#8: Employee base and attrition
Employees are backbone of an IT co. and recurring attrition is a challenge as it delays client projects. Also there is high cost in training an upskilling.
Attrition has been high in 20%+ range for Indian IT. TCS at 22% is relatively better.
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With start-up funding declining, attrition will likely not be an issue. For TCS, attrition was lower by 0.2% but net employee count declined by 2.2K, only third such instance in last decade. This has raised some concerns on demand slowdown. Look for other IT results on this.
With start-up funding declining, attrition will likely not be an issue. For TCS, attrition was lower by 0.2% but net employee count declined by 2.2K, only third such instance in last decade. This has raised some concerns on demand slowdown. Look for other IT results on this.
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