Add these 3 vital metrics to your arsenal this quarter and analyze IT stocks!
Tata Consultancy Services, India’s largest IT service provider, and rivals Infosys and Wipro kicked off the third-quarter earnings season by declaring their results on January 12, 2022. While, overall profits and sales are important for such software companies, as an investor, it is important to go beyond these while picking and analyzing stocks. The IT industry has several business metrics that show the progress of a company’s business goals.
Here are 3 things you should be tracking!
We know that software companies do not sell goods, they offer services. Projects may run for months at a time and companies charge for these services on a per-employee, per-hour basis. This is what is referred to as the billing rate. For IT companies, employees are the biggest assets, but the profit-making ability of the employees is hard to gauge. A way of getting insight into this number is by looking at the billing rate. It reflects how much revenue the average employee earns for the company and this helps measure IT business efficiency and profitability.
One must keep in mind, that billing rates are different from average realizations. Average realizations are affected by a mix of services, verticals and geographies where they are involved. Moreover, with increasing automation, average realisations per employee are increasing even if billing rates are stable or declining.
With clients transitioning to work-from-home and demand for cloud, collaboration and cybersecurity-related technologies shooting up, many IT services companies report strong growth in digital business. While digital is defined separately across organizations, typically practices that cover emerging technologies like cloud, mobility, analytics, Internet of Things (IoT), and cyber security are clubbed under digital business.
These are the emerging themes and clients globally are spending billions of dollars on these initiatives. Several brick-and-mortar companies are shifting online, mobile-enabling their operations, etc. Companies that have developed capabilities early in these services will tend to benefit.
For example, Infosys Ltd, which continues to note its digital revenue separately, for the third quarter—ended December 2021, saw its digital revenue grow 42.6 per cent YoY in constant currency to US$ 2,487 million, contributing 58.5 per cent to the total revenue.
The Indian IT sector has clients in the US as well as European Markets. The domestic IT market, in fact, forms a very small part of the revenues for IT majors in India. The services provided to global clients in US/ Europe and other countries are called off-shore services and form a very large part of the revenue. This differs from on-site revenue services, which is provided to the client from the client's location. Off-shore services come at a higher margin because employee costs in India are much lower than those in on-site locations. Thus, more and more companies try to bring work off-shore. The onsite-offshore revenue mix is a key metric one can keep track of as it has an impact on overall margins.