Understanding IT sector

Dear investors,

As it is imperative to understand the business before investing, it is prudent to get conceptual understanding about the sector. Unfortunately, we don’t have any sectoral domain thread on Indian IT industry. There are obviously reports available online telling how well is everything (exports, employment, etc.) but that is not helpful.

It would be beneficial if VP domain leaders can provide insight on how IT industry is structured and how one IT company is different than the other (product, services, saas, AI, cloud, digital, fintech, the list goes on). Brief example of company profiles would also be helpful. Also discussion on valuing the IT companies too would be beneficial.

Some time back one of the member had posted detailed sector analysis on semiconductor sector.

NOTE: Have filed this under “Investment Learning” as to not clutter with other threads.


I have a different opinion on this, as I am an outsider to IT, and saying this under the presumption that you are one, since you have asked about a sectoral thread. If you are not, just skip the reply.

One side of the argument regarding Indian IT is that, most of the Indian companies are almost one and the same, ‘me too’ kind of companies. They all do the same kind of work, no differentiating factor. The other side of the argument is that a few companies are doing something different, which is evident from the multiples they trade at.

IT is not like Chemicals or Pharma, it is not that nuanced. But for a complete outsider who does not work in IT, who does not deal with code day and night for a living, to gauge the scope of IT, to differentiate or categorize all the companies, to understand the many domains, the tools, the certifications, their business verticals, the nature of projects, client requirements, the upgrades, the ever changing canvas of technology, to understand inside out, could be difficult.

I can draw a parallel with an FMCG company. Just like an IT company which gets a portion of its business from US or Europe, an FMCG company has also a revenue stream coming from Africa. We could asses what kind of impact African business is having on the FMCG company without deeper understanding of the African business, from the numbers, management commentary, reports etc. But in the case of the IT company, we have to know what kind of projects they are taking up in those distant geographies, what tools they are working on for those projects, what kind of hiring is required for such projects, how long term are the projects, updates on new deals, pipeline, attrition rate etc.

The practical and hands-on approach certainly is an added advantage. Because the sector is big, with second biggest share in Nifty.

Perhaps, a reason why no such detailed sectoral analysis thread is not present, it is vast, and not many know about all the work that is carried out in all the companies of the sector, or the companies do so much that listing and describing them all in itself is a task.

Indian IT may have started the next leg of its big journey, and Indian IT companies are more than capable of handling the stream of demands, with in house and M&A capabilities. And I know, for an IT person with a few years of experience, making good money in IT sector is not a difficult task. For complete outsiders, who want to participate in what appears to be a multi year uptrend, a basket approach in my opinion is sensible.

I myself will say this too, I know that IT is not rocket science, paradoxically, it is just IT, so one can gain decent knowledge of the sector, but I am of the view that, this specific IT sectoral knowledge that is acquired is not applicable elsewhere.

I have no intention of curbing the enthusiasm of anyone who is seeking knowledge, because I am an enthusiast myself and this is VP - who comes with an appetite to learn, will leave full.

Just my 2 obsolete Windows XP views, for what they are worth.

I have exposure to in IT through index and MF.


Then why do we have LTTS at PE of 67 and TCS at 37?

Hence, the need of this thread.

Understanding this is what will differentiate between mundane investment vs alpha. To give you an example, I was analyzing an IT company which was positioning itself as a “fintech” with “digital disruption” but basically it as a SAAS product.

I agree to what you have mentioned in your reply (and thanks for your views, appreciate it!). It is not easy to differentiate one IT company from another. Maybe for a not so aggressive investor it would be prudent to invest in basket of IT sector. But considering the members and motto of this forum, we are here to Separate the Wheat from the Chaff.


The following may be well known and primitive in this forum, but I am posting this in the hope that this might help some.

I would mainly categorize IT companies as Product companies and Service companies. Most Indian IT companies come under Service category. American companies rule the Product category.

Service companies usually have multinational clients like Banks, Insurance companies, etc. These clients need IT systems to be specifically created and maintained for them. That’s the job of service IT companies.

Product companies, on the other hand, don’t work for individual clients. They may initially work with individual clients to develop a product. But the product is meant to cater to large category of clients. As the product becomes popular in an industry/domain, it will attract more users. The products shall be designed well so that it can be customized for individual user’s needs as well.

Customization for specific needs is the area of some overlap between service and product companies. Typically, service companies take the work of customization of the products to specific clients provided by product companies. E.g. SAP is a product company with ERP product and TCS, a service company, might customize and deploy this product for a multinational.

Some service companies may even claim to have built products, similar to product companies, as they have pre-built stuff to easily cater to clients. However, products of product companies cater to large number of clients while comparatively service companies cater to fewer clients.

Microsoft is an example of a product company. Windows operating system, Office product suite, even their Azure cloud are all their products. They cater to millions of users (product companies call their clients ‘users’, while the word ‘client’ is mainly in the domain of service companies). If you require an Indian example of product companies, Zoho is one.

Infosys is an example of a service company. They mainly have people to work on IT systems of specific clients. For example, they rebuilt the Income tax system for the Indian government. It is less likely they will make this as a product to cater to other governments. They would mainly have teams to maintain the income tax system for the govt. This would be their revenue source in the long run.

Once we understand these two major ways of operating, all other jargon is simple to understand. For example, Zoho is a product company which is in SaaS domain. SaaS simply means that they provide their product/software as a service through internet. This way, users need not buy software CDs from the company and install it on their machines. Instead, users just fire their browser and use the software through a website, e.g. Zoho Docs. Typically, SaaS companies work on subscription basis instead of one-time sale.

Any other jargon you throw in, artificial intelligence, fintech, cloud, etc, you can understand the business through the broad categorization of product or service industry. AI is just a technology which can be used in variety of ways. It can be used by both product and service companies, but their business dynamics will be based on whether they are a product company or a service company. Take fintech, Paytm is a product company who work in fintech domain. Their products are not specific to any particular user or company. They always build in such a way that their work caters to many users and many companies. Fintech for an existing bank like KVB would have been built and maintained by a service company.

Product companies are where the economies of scale play a key role. Their expenses won’t dramatically increase with the increase in the number of users. This is not the case with service companies.

The term body-shopping is mainly associated with service companies, as fundamentally they send people to work for another company (‘client’) as long as they have the contract. This means, for service companies, head-count plays the role of growth. This will be in the order of magnitude slower than the growth of successful product companies.

On the other hand, it may be easier to succeed in service industry in India due to availability of cheap labour compared to the west. Our IT service industry has been playing this arbitrage so far. Genuine innovation is required to succeed in product industry (not just in IT). This is where we had been lacking, and I think this is where we started progressing.



Yes, some trade at FMCG multiples, but these all depend on the kind of work they are doing, the kind of business verticals, businesses, and markets they are catering to, the niche segments they are working in, their IP, their association with the clientele, their deal making abilities etc.

We are cheap, abundant, capable, experienced, stable and we deliver. And since we have grown into a large sector which helps and kind of even pushes the economy forward, we will grow but may not be as much as in the past or if the need and urgency arises, we will grow bigger and fast again. The larger firms are cash rich, so as and when something new is available, they will do M&A.

My limited point was, people who are working in the sector have a clear advantage here compared to people from other professions who do not have any experience regarding writing code or the integration of different teams working on different tools for the same outcome. This happens with all the companies, but in IT, I think this looks more like an academic exercise because we cannot visualize the work they do as it is intangible, unlike a machine.

I am talking about investors who are older, who do not have their family members, or acquaintances working in IT. For millennials and younger generations, like I myself had mentioned, this is just IT, part of life.


Sharing this blog link for technology writeups which I follow.


My two cents on this:

  1. IT Services sector is primarily what the Indian IT sector is all about and whereby the service providers help Enterprises manage their IT infra and go digital. This could be through Cloud, AI, BPM, Block-chain etc. Fintech’s, Start-ups, Product cos are still a small part of the equation for India atleast.
  2. So as such the IT services sector is not married to any particular technology or vendor which also means they have to be relevant and keep upgrading.
  3. There is some differentiations in the service offerings based on some vendors being more infra focussed, platform based, Sub-contractor, BPM, Industry focus offerings and of course the ability of the Tier-1 to compete on scale.
  4. The business and client relationships are quite sticky since once a vendor has the intracacies of the business, it’s difficult and needless to change vendor and the know-how they’ve especially of legacy technologies. One of the Moats enjoyed.
  5. Some of the challenges the sector faces includes the supply-side resource contraints especially in the current environment, the move towards cloud and digital technologies will lead to a lesser corelation with the man-hours required versus legacy technologies, emergence of low-cost tools. In the current enviornment, the HR aspects related to Manpower is a burning issue.
  6. Competition includes On-shore providers, Off-shore IT service providers in low-cost locations particularly from within India, solution and service providers that compete in a specific geographic market, industry or service areas including agencies, engineering service providers, technology start-ups and Captive centers and in-house IT departments of large corporations of large corporations that use their own employees rather than engage a vendor.
  7. The sector is amongst the few industries which is a Cash spinners and doesnt need to re-invest, giving away most of the money. The sector has a growth visibility for the next few years courtesy the digitization wave fast-forwarded due to the pandemic.
  8. I would still value it basis the present value of the future cash flows since there is a clearer visibility.
  9. The Sector has from time to time been writtent off but has managed to shrug it off and now we are in solid growth period.

Do you guys think it is prudent to invest in a IT / Tech sector specific mutual fund rather than stock specific?

Obviously, with a person without IT domain knowledge it would be the only option. But the problem is most of the IT mutual funds are heavy on large cap stocks, which are already bloated in valuations.

So I am confused what to do. :thinking:

The reasons perhaps for the high allocation to large cap stocks are, size is not a deterrent in case of IT companies, it is in fact an advantage, as they do M&A, not that all such deals will be beneficial, but they grow. Also, they grow relatively higher than their counterparts of same size, like in FMCG sector, as they go into new geographies, new verticals. And they give dividends. So even an IT index fund is not a bad choice, in this regard.

An IT fund is obviously a better choice, as the diversification is more. The fund can invest in new companies, new technologies, can even invest in US stocks. The choices are many, as the definition and universe is big.

Just my thoughts.

Invested in both index and MF.


I have been going through the portfolio of 3-4 IT funds. 70% of portfolio is nearly same all tcs, infosys, etc. If we are paying 1% charge to fund manager than we expect him to do some quality research. Otherwise, we can simply invest in top 10 companies rather than wasting 1% of corpus every year.


If you are thinking about investing in an IT/Tech sector MF, I would rather suggest you create a bucket of Top 4-5 players and invest in them directly. This will help you to save on MF fees.
The big players have many advantages and they can poise to grow further for the below reasons

  1. Diversification which can help to overcome any region specific headwinds
  2. Good brand image which is a MOAT in winning 50M plus deals (Many large corporations will look at the size, financials of the company in RFQs)
  3. Good internal systems for constant upgrade (The academy’s in Infosys, Wipro are known to create a good pipeline of home grown leaders)
  4. Low attrition and high employee loyalty (E.g. TCS followed by Infosys enjoys the least attrition compared to mid-sized companies like Mindtree, TechM)
  5. While the upside potential is good, the downside risk protection is also very high compared to huge swings in price movement with midsized players
  6. Agility to diversify in to new areas. A recent report puts HCL ERD above that of Tata Elxsi, LTTS which will reduce concentration risk.
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There should be no comparison. If we can invest on our own by analyzing companies, we can very well do so. But if we do not have such sector knowledge, if we cannot understand the nuances, but have a compelling reason to invest, so as to ride the momentum (if it exists), then we have to do so either through index route, with high allocation to top 5 companies, or invest in a fund, with better diversification.

Also, would you be holding on to your funds forever? Say, if the momentum with interim ups and downs, will continue for 2-3 years, and then stops, and starts falling or gets into consolidation, would be still be holding?

My point is, the reason for choosing a MF is for its diversification, which may or may not give better results compared to the index. If we are not sure of the return, if we think that, despite the management’s efforts, the fund cannot beat its benchmark index, then we can opt for index.

Or if are an active investor, you can invest in ETFs and get in and out, depending on the market, sector movements.

There are a few ways to go about it, depending upon the objective.

Totally agree. Best way to select 4 top companies in IT and be sorted. Why pay high fees to sectoral fund managers, if anyway they will be 80% invested in same top 4 companies? Also, you correctly pointed out Midcap It have very high volatility. I was invested in TataElexi…It gave me 38% returns in just 2-3 weeks…I was so scared that i sold it immediately…It can go down with equal speed. So I invested in HCL, TCS…LTI…but then saw that even Infosys started doing better in last 1 year…so invested in that also. We unncessarily get distracted to midcap It with fancy names and Hot phrases. Same ER&D, which TATA Elxsi doing…is also done by HCL…Then why should I go for TATA elxsi? earlier I was also into Mindtree…Then I thought, I already has LTI from same management…then better sell Mindtree…Now with 5% allocation each…total 20% allocation to sector, I am sorted…Now i will ride with them for next decade atleast…No need to go anywhere…If any transformative technology comes…these guys will be the first to adopt and earn from it…no worries…no overthinking…


One of the best discussions on the IT Sector. Liked it hence posting here.


Source: Redington Annual Report


Can anyone please explain… If top 10 IT companies are all doing same stuff then why Tech M and Wipro has corrected more than tcs, infy in last 1 year?


TCS, Infosys , Wipro these are traditional IT companies working mostly work on the support, gradual improvement in the systems though they have started working on digital space but not much. There strength is mass base in offshore and getting done with less exp ppl and earning making the profits. in this TCS is ahead and they much successful. Now due to Covid lot of dependency got create on IT & for last few years lot of IT work was suppose to be done got forced to do due to covid crisis and this literally created unprecedent opportunity in the IT space. Now you may say the company should have report big profit but they are sole dependent on the people who started changing jobs & this triggered heavy attrition rate across these companies. So the cash benefit which company got transferred to the consultant and this impacted earnings of these companies! Now coming to new age -IT like Cloud/AI/machine learning still long way to go. In the current context we have to check on the Happiest mind, LTTS and TATA Elxsi


They are doing the same thing but slightly differently. This means to say TCS is “The TCS” due to their execution quality. That is visible is their operating margin; TCS is having 26-28% whereas Tech M is around 18%. Hence even after yesterday’s fall, TCS is less than -20% YTD whereas Tech M is -43%. Current TCS PE is 30 (3 Yrs avg is 23) whereas Tech M has a PE of 18 (3 yrs avg is 16).


Would like to add the comparison of Wipro.
They have been on buying spree. A lot of acquisitions in recently. And as per my limited understanding, market does not reward inorganic growth; especially with less margins.

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