The IT sector is one of the most important and rapidly growing sector in India. It includes various companies that provide a range of services such as software development, IT consulting, cybersecurity, and IT infrastructure management. Investing in IT stocks has been a profitable, but many investors struggle with understanding how to analyze these stocks properly. Sometimes you pick those stocks which are not worth to add in your portfolio.
Types of IT Services
Many of us know that IT companies means only TCS and Infosys. Thats not true. IT companies provide different kinds of services, and each type has a unique business model and revenue source. TCS and Infosys has different business model.
1. IT Consulting – Helping Clients with IT Needs
Imagine you want to start a business and need an IT setup. IT setup means you may need computers , sservers, software , etc but you don’t know how many computers, servers, and security measures you needed to run or start a business. This is where IT consulting companies come in. They help businesses decide on the right technology solutions for their operations.
Example:
A bank wants to modernize its IT infrastructure but is unsure about which cloud service to choose (AWS, Google Cloud, or Microsoft Azure), how many servers it needs, and what security systems to implement.The bank hires Accenture or Deloitte, which analyze the bank’s requirements and provide expert advice.The consulting company earns money by charging fees for these services.
2. Software Development – Creating Software for Clients
Most businesses need software to operate efficiently. IT companies develop software applications that help businesses manage their operations.
Example:
When you visit a bank, the employees enter customer data into banking software. This software is developed by IT companies like TCS or Infosys.
A company like HDFC Bank may hire TCS to develop a mobile banking app.The IT company first designs the app (planning features and user interface), then develops it using programming languages like Java and Python.Once the app is ready, the bank pays the IT company for the development work.
3. IT Infrastructure Management – Maintaining & Upgrading IT Systems
Large businesses need strong IT infrastructure, including servers, data storage, and networking. IT infrastructure management companies ensure these systems run smoothly.
Example:
IndiGo Airlines has an online flight booking system.
One day, the website crashes due to heavy traffic.The company managing its IT infrastructure (such as HCL Tech or IBM) fixes the issue, ensures the data is safe, and prevents future crashes.These IT service providers earn money by maintaining IT systems for businesses.
4. Cybersecurity Services – Protecting Businesses from Hackers
Cybersecurity companies help businesses protect their data from cyberattacks and hacking attempts.
Example:
A bank faces a hacking attempt where criminals try to steal customer information.The bank hires Palo Alto Networks or IBM Security to identify the security weakness, stop the attack, and strengthen the bank’s security systems. Cybersecurity firms make money by offering security solutions and support services.
How IT Companies Get Projects
Unlike manufacturing companies that sell physical products, IT companies earn revenue by securing projects from clients. Here’s how they get projects:IT companies bid for contracts from industries like banking, healthcare, and government sectors.Clients select the IT company based on expertise, pricing, and reputation.Once the contract is signed, the IT company starts working on the project.
Example:
Infosys wins a ₹10,000 crore contract from a US bank to manage its IT system for five years.This means Infosys will earn revenue from this project over the next five years.
Steps Involved in IT Projects (Value Chain Explained Simply)
Every IT project follows a structured process before completion of any projects. Let’s break it down.
1. Understanding Client’s Needs (Planning & Analysis)
The IT company studies the client’s business model to find areas of improvement.
Example: TCS sends a team to a hospital to understand its patient data system and suggest a digital transformation strategy.
2. Designing & Developing the Solution
The company designs the software (interface, features, functionality).Development involves writing code using programming languages like Java, Python, or C++.
Example: HCL Tech develops SBI’s mobile banking app using Java and Python.
3. Testing & Launching the Software
Before launching, the software is tested for bugs, performance, and security vulnerabilities.
Example: TCS tested Aadhaar authentication software to ensure it works for millions of users without issues.
4. Support & Maintenance (After-Sales Service)
IT companies provide post-launch support to fix issues and offer updates.
Example: Wipro provides 24/7 technical support for Reliance Jio’s billing system.
Key Metrics to Identify Good IT Stocks
When analyzing IT stocks, investors should consider the following financial metrics:
1. Revenue Growth – More Sales, More Profit
✅ Why it’s important?
Revenue growth shows how well an IT company is securing new projects and expanding its client base.Consistent growth indicates a company’s ability to stay competitive in the market.Higher revenue often leads to better profitability and shareholder returns.
📌 Example:
TCS’s revenue grew by 10% in FY24 because it won new contracts in banking and healthcare. This shows the company is expanding its business and gaining more customers.
2. Total Contract Value (TCV) Growth – Future Earnings Indicator
✅ Why it’s important?
IT companies earn revenue from long-term contracts.A higher TCV means the company has secured future income, ensuring financial stability.It helps investors predict how much revenue the company will generate in the coming years.
📌 Example:
If Infosys wins a ₹20,000 crore contract from a European bank, it secures future earnings for several years, reducing business uncertainty.
3. EBIT Margin – Profitability Measure
✅ Why it’s important?
EBIT margin (Earnings Before Interest & Tax) shows how efficiently a company is generating profit from its operations.Higher margins mean the company is controlling costs well while increasing revenue.Investors prefer companies with stable or growing margins because they generate more profit per rupee earned. Read PE Ratio.
📌 Example:
If Wipro improves its EBIT margin from 18% to 22%, it means the company has reduced costs and is earning more profit from its services.
4. Attrition Rate – Employee Retention
✅ Why it’s important?
IT companies rely on skilled employees to deliver projects.A high attrition rate means more employees are leaving, which increases hiring and training costs.A low attrition rate indicates employee satisfaction and better productivity.
📌 Example:
TCS has an attrition rate of 12%, while Wipro has 19%. This suggests that TCS retains employees better, leading to more stable project execution.
5. EPS Growth – Profit Per Share
✅ Why it’s important?
Earnings Per Share (EPS) shows how much profit the company makes per share of stock.Rising EPS means the company is growing profits, which can lead to higher stock prices.Investors use EPS to compare profitability between companies.
📌 Example:
HCL Tech’s EPS grew by 15% in 2024, meaning shareholders earned more per share compared to the previous year.When selecting IT stocks for investment, look for companies with:
✅ High revenue and contract growth (steady new projects). ✅ Strong EBIT margins (profitable business model). ✅ Low attrition rate (retains top talent). ✅ Consistent EPS growth (increasing profits per share).By analyzing these simple metrics, you can identify strong IT companies for long-term investment!
