Reading an IT company's health.
Look past the big sales numbers. Check utilisation, attrition, and the deal pipeline.
An IT major announces record-breaking sales. The headlines are glowing. Yet, on the stock market, the mood is quiet. Experienced investors are looking at something else entirely, something hidden in the notes to accounts. They know that headline revenue, while important, isn't the full story of a company's health. It's often the beginning of the inquiry, not the end.
Revenue is the first number we see. It's the total amount of money an IT company invoices its clients for services rendered, usually in US dollars, as most of their clientele is international. The Indian tech industry's revenue was a massive $254 billion in FY2024, a testament to its global scale. But this number only tells us about the past. It doesn't tell us about the quality of that income, how much it cost to earn, or its future trajectory. It’s the starting point, not the conclusion.
Utilisation is a better guide to a company's health. This is the percentage of employees working on billable client projects. An employee who is not on a project is 'on the bench'. They are still being paid a salary, but they are not generating revenue. Think of them as a factory machine that is sitting idle. For top IT firms, a utilisation rate between 80-85% is considered healthy and efficient. Why not 100%? Companies need some buffer for training, new projects, and employee transitions. A rate above 90% might indicate that the company is understaffed and employees are overworked, which can lead to burnout and higher attrition.
Attrition is the leak in the bucket. It is the rate at which employees leave the company, often expressed as an annual percentage. If a company has high attrition, it's a major red flag. It means they are constantly spending money to recruit and train new people, a costly and disruptive cycle. This high churn can disrupt projects, damage client relationships, and signal deeper operational or cultural problems. In 2024, top IT firms saw attrition fall to a healthier 12-14%, down from over 20% in the post-pandemic talent war. A lower number is always better, as it indicates a stable, experienced workforce.
Finally, look at the deal pipeline, or Total Contract Value (TCV). This is the total value of new contracts the company has won in a given period. It's a forward-looking indicator. A strong and growing pipeline is a powerful signal of future revenue. It tells you that the company's services are in demand and that it has a clear path to growth. Investors often look at the 'book-to-bill' ratio, which compares the value of new contracts (bookings) to the revenue billed in the same period. A ratio above 1 suggests the company is winning new business faster than it is recognizing revenue from old contracts, a very healthy sign for the future.
The Two Chai Stalls
Imagine two tea businesses. One is a fancy cafe in an expensive mall. It sells a lot of tea and snacks, but has high rent, expensive decor, and many staff who are often idle during non-peak hours. The other is a simple 'tapri' by a busy roadside. The owner has a few helpers who are always serving a long queue of customers. His costs are low, his helpers are always busy, and his customers are very loyal, returning every day for their fix. The tapri might have lower total sales than the cafe, but it turns every rupee of investment into more pure profit. An IT company with high utilisation and low attrition is like that efficient tapri: it's not about how big the sales are, but how efficiently you generate them and keep your team together.
Why this matters
When you analyse an IT stock, you are checking the health of a people-driven business. High revenue growth is attractive, but it can hide serious problems of inefficiency or poor management. A company that is constantly replacing its staff (high attrition) or has many skilled employees sitting on the bench (low utilisation) is fundamentally inefficient. It's like driving a car with the handbrake partially engaged. You're still moving forward, but you're burning more fuel and wearing out the engine to do so. Over time, these inefficiencies will erode profits and, ultimately, your investment returns. Looking at these deeper metrics helps you separate the efficient, well-managed companies from those that are simply growing for the sake of growth. It's how you find companies built for the long haul, not just a good quarter.
Where people go wrong
- Ignoring attritionHigh attrition is a fire alarm. It signals deep-seated cultural problems, management issues, or non-competitive pay. It directly hurts project quality, client relationships, and operating margins due to constant recruitment and training costs.
- Fixating on revenueHeadline growth is useless if it comes with falling margins or poor employee utilisation. Profit quality, which is a function of operational efficiency, matters more than the raw revenue number.
- Misinterpreting TCVA big TCV number looks great, but it's important to understand the duration of the contracts. A $100 million deal over 10 years is very different from a $50 million deal over 2 years. Look for the annual contract value (ACV) for a truer picture of yearly revenue impact.
- Thinking all IT is the sameCompanies have different specialisations (e.g., banking, healthcare), geographical client bases, and management quality. A company focused on high-end consulting is a different beast from one focused on legacy system maintenance. You have to dig deeper.
- Relying on the rupeeA weak rupee can provide a temporary, unearned boost to profits, but it is not a sustainable business strategy. Currency movements are volatile and unpredictable. A solid business is built on operational excellence, not a favorable exchange rate.
Beyond revenue, check employee utilisation and attrition rates for true company health.
A strong deal pipeline (TCV) is the best indicator of future growth.
A weak rupee helps profits, but it is not a long-term business strategy.
Investors are often drawn to the bright light of revenue growth. The real insights are found in the shadows, where things like employee satisfaction show up as numbers.