Every quarter, a wave of earnings announcements from India’s software exporters sets the tone for the entire sector. Those who track IT Stocks know that a single result can lift or drag an entire group of companies within a day. Even a casual observer of the Wipro Share Price on result day can see how quickly the market reacts to numbers and management commentary. Learning to read these results properly will help you respond with understanding instead of impulse.
Start with Revenue Growth, but Choose the Right Measure
Reported revenue growth in rupees can be misleading due to the impact of exchange rates. Many analysts like to see the growth in constant currency, to weed out the impact of swings in the value of the rupee versus the dollar and get at the real demand.
Look at both sequential growth (compared to the previous quarter) and year-on-year growth.
Sequential gives you an idea about the current momentum, whereas the annual view helps to smooth out seasonality. Q4 has fewer working days and furloughs as compared to other quarters; hence, a dip then need not always be a problem.
Operating Margin: The Quality Check
Operating margin shows how much profit the company gets to keep for every rupee of revenue, before interest and taxes.
It is a good number to watch because a rising operating margin could be the result of improved utilisation, tailwinds in the currency, less subcontracting, or cost control. On the flip side, a dip could be due to hikes in wages, investments in new capabilities, or pricing pressure.
Do not forget to read the fine print. The management talks about what gives and takes in the operating margin, and this hints a lot about the nature of the change.
Deal Wins, Pipeline and Client Metrics
Large deal bookings tell you about the quantum of work that has been bagged for the future. Watch out for the ratio of new business to renewals.
New wins point towards your ability to win business, and renewals highlight client satisfaction.
Client concentration is another ratio worth watching. Firms report how much revenue comes from their top 5 or 10 clients. The more it is, the riskier it is. Watch out for the number of clients in the top revenue brackets as well, since growth in this bracket will mean deeper relationships with existing clients.
Headcount, Attrition and Productivity
Total headcount tells you about the trajectory of the company since more heads usually mean higher revenues. It is a good sign if revenues and headcount are rising together. However, if the latter is dropping while the former is up, it points towards improved productivity or use of automation.
Attrition rate measures the rate at which employees are leaving the company. It has an impact on costs as well as quality of execution. Higher attrition means higher costs of replacements and inordinate delays in project delivery. A declining attrition rate is a good sign whereas abnormally low attrition in the face of slow hiring is a bad sign.
Cash flow and Capital Allocation
Look at the ratio of free cash flow to net profits. If it is close to or over 100%, it means that cash is being generated even after profits have been booked. Lower ratios could be due to delayed receivables from clients or higher working capital needs.
Review the capital returned to shareholders in the form of dividends, buybacks, and acquisitions. Acquiring other firms provides with capabilities, but comes with risks of integration and goodwill on the balance sheets. A pattern of prudent capital allocation is a better guide than individual large deals.
Guidance and management tone
Many companies give a guidance range for revenue growth in the next quarter. Compare it to the estimates of analysts, as well as the growth that the company has reported. Repeated beating of estimates is a positive sign while repeated misses are a bad omen.
Listen to or read the transcript of the conference call. Analysts ask tough questions about client budget freezes, pricing, and project delays, which are not apparent in the press release.
Avoiding Common Mistakes on the Result Day
Do not trade in the first hour, as the market digests the news. The market moves on surprises, and a good result can result in the scrip tanking if expectations were higher. Read the documents thoroughly and understand if the long-term thesis has changed.
Make a one-pager with the relevant ratios for revenue growth, operating margin, attrition, deal wins, and cash flow for the companies you track. Update it every quarter. As time passes you will see trends emerge, making it easier to make decisions.
Closing Thoughts
Results are only snapshots, but together, they provide the narrative of direction and quality. A patient reading of the documents is one of the best skills an equity investor can learn.
