By admin 
Few sectors have shaped the Indian equity story as consistently as technology services. Investors who follow IT Stocks closely know that quarterly results, deal wins and currency movements can change sentiment within days. Many of the same investors also keep an eye on the Jio Share Price whenever the digital and telecom conversation heats up. Before deciding where either interest fits in a portfolio, it helps to understand what truly drives earnings in this industry.
How Technology Companies Earn Their Revenue
Most large technology companies will provide services to clients, including software development, maintenance, consultancy, cloud migration and business process. Many of their clients will be overseas and contracts are often for multiple years meaning there is some visibility of revenue. Revenue can be charged on an hourly basis, fixed price or based on outcome.
As payments are received in foreign currencies and costs (particularly salary) are often incurred in Rupees, exchange rates are an important factor. A weaker Rupee will increase revenue in Rupee terms and therefore can help margins. However, a stronger Rupee can have the inverse effect on revenue. Large companies will use hedging to reduce the impact of exchange rate volatility.
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Key metrics to watch as a Numbers Analyst:
Constant currency revenue growth – This shows how much revenue growth the company has achieved without considering any exchange rate movements.
Operating margin – This shows how good they are at pricing, using employees and controlling costs.
Pipeline – This shows how visible revenue is going forward. Big wins give insight into how visible revenue is.
Attrition – High attrition means increased costs related to recruiting new employees and training them.
Headcount trends – If headcount is rising it shows confidence in demand.
It is important to note however that just because one metric looks positive it does not tell the full story. For example a company may be showing high revenue growth but losing margin due to increasing salaries. They may also be looking to protect their margins by reducing the amount they are hiring, which could mean they are limiting growth.
People
This industry revolves around people. Salary inflation, skills gap and high attrition can mean profitability can change quickly. Therefore companies invest heavily in training. They also invest in developing skills within new areas such as artificial intelligence, data analytics, cybersecurity and cloud platforms.
Technology changes can create opportunities but also risks. Automation can increase productivity but reduce the amount of basic work being performed which could have previously created large revenues. Companies who adapt to move into more high value services will usually be better at protecting their margins. However they will face competition from global consultancies, product companies and smaller niche companies.
Dividends and Buybacks
Many mature technology companies have high free cashflow and little debt. This can allow them to pay steady dividends and sometimes perform share buybacks. This can be an attractive feature for an income focused investor, however a high dividend shouldn’t be the only reason to invest in a company. Quality of earnings and growth are much more important long term.
Telecom & Digital Services
A telecom/digital services business operates very differently to an exporting technology services business. Revenue comes from domestic customers, data and digital services. It also faces high ongoing capital expenditure to develop their networks and spectrum. Debt levels, exposure to regulation and competition will be quite different to technology services.
If you are interested in investing in any of the companies in this area make sure you check with your official exchange and regulator to see how they are able to trade. Only use transparent channels and be wary of anyone offering to trade them at certain prices.
Putting together a sensible portfolio
A good portfolio will usually not be driven by one sector. Technology services can be a good part to include alongside other areas such as Banking, Consumption, Healthcare, Energy and Manufacturing. Including diversified equity funds and index funds will allow you to gain exposure to the whole market without having to analyse balance sheets.
When investing in individual stocks, limit how much of the stock you invest in. Invest in tranches and review how the company is performing after each annual report. Use limit orders to keep control of the price. Do not borrow to invest.
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Taxation and Documentation
Capital gains tax applies to shares depending on how long you have owned them. The rules have changed recently in the Union Budgets. Make sure you check what the rules currently are by speaking to someone official or your chartered accountant. Always keep your contract notes and statements.
Understanding what is driving earnings will help turn market news into useful information. Understand the business model and focus on the few key metrics. Be patient!