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Start with suitability, not the share-price chart
SEBI says investors should match investments to their goals, time horizon and risk tolerance. A profitable company can still be a poor holding if you may need the money soon, cannot tolerate a large decline, or already have excessive exposure to technology stocks.
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Define the job the investment must do
Write down whether the money is for a long-term goal, a medium-term objective or a speculative allocation. Your horizon determines how much volatility you can reasonably withstand. Equity prices can fall sharply without warning, and a company that fails can leave its stock worth nothing; the NSE’s first-time-investor guidance explicitly warns of that bankruptcy risk.
Check liquidity, diversification and taxes
Keep emergency funds and near-term expenses outside a concentrated equity position. Consider how much of your portfolio would be exposed to one company, the Indian IT sector, the rupee, or overseas technology spending. SEBI describes safety, returns and liquidity as investment pillars and says asset allocation depends on goals, risk tolerance, horizon and market outlook. Also account for applicable taxes, charges and the effect of selling during a downturn.
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Understand exactly how the company makes money
SEBI’s due-diligence checklist begins with the business and its business model. You should be able to explain, in plain language, what the company sells, who pays for it and why those customers keep buying.
Map products, services and revenue contracts
Separate recurring managed services, maintenance and subscription-like work from project-based implementation, consulting and one-time contracts. Identify whether the company mainly provides application services, infrastructure work, engineering, business-process services, cloud work, cybersecurity or other offerings. A company growing through repeat contracts has a different revenue risk from one dependent on winning large projects each quarter.
Identify customers and demand drivers
Determine which industries and regions supply demand. Banks, retailers, manufacturers and public-sector clients do not spend on technology for the same reasons or on the same timetable. Ask what would cause customers to increase, delay or cancel spending: economic weakness, a merger, a regulatory change, a technology migration or pressure to reduce costs.
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Assess competition and economic sensitivity
Read management’s description of competitors and the factors that could affect growth and share price. Compare the company’s capabilities, pricing power, delivery footprint and ability to retain skilled staff. Do not assume that a large addressable market guarantees shareholder returns; intense competition can transfer growth to customers through lower prices.
Read the financial statements over multiple years
Use the income statement, balance sheet and cash-flow statement together. SEBI’s guidance calls for examining at least two years of financial statements, which helps distinguish a durable trend from a single unusually strong or weak period.
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Test profit quality and cash conversion
Compare reported net profit with cash generated from operations. If earnings rise while operating cash repeatedly lags, investigate receivables, contract assets, acquisitions, capitalisation policies or other explanations. Strong cash conversion is not a guarantee of future returns, but persistent divergence deserves an explanation before you rely on accounting profit.
Track margins and returns, not just revenue
Follow operating margins, net margins and returns across several reporting periods. Ask whether changes reflect pricing, utilisation, wage costs, subcontracting, currency movements, acquisitions or a temporary mix shift. A higher growth rate is less attractive if each additional rupee of revenue produces less cash or requires materially more investment.
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Review debt, cash, lease obligations and working-capital movements. Services businesses can appear asset-light yet carry significant obligations or experience swings in receivables. Check whether customer collections are keeping pace with sales and whether management explains unusual changes in days sales outstanding or contract balances.
Strip out one-off effects
Mark restructuring charges, acquisition costs, impairment, gains on asset sales, tax benefits and other exceptional items. Recalculate the underlying direction without treating a one-time benefit as recurring profit. Read the notes to the accounts and the auditor’s report rather than relying on a headline earnings number.
Read current disclosures, not only older summaries
The latest annual report, quarterly results and stock-exchange filings provide the most current evidence. Compare management commentary with audited numbers, segment disclosures and corporate announcements. SEBI advises investors to read documents carefully and use financial statements and announcements in their due diligence.
Reconcile the narrative with reported results
If management describes strong demand, look for corresponding revenue, bookings, margins, hiring and cash-flow evidence. If it cites a temporary slowdown, check whether the effect appears in affected segments and geographies. Treat forecasts, targets and “pipeline” language as expectations rather than achieved revenue until the company recognises the sales.
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Watch for changes in definitions
Companies can alter segment groupings, constant-currency presentations or operating-key-performance-indicator definitions. Note the basis used in each period and avoid declaring an improvement when the measurement itself changed. The same label—such as utilisation, digital revenue or large-deal value—may not be directly comparable across issuers.
For IT-services companies, examine the operating engine
Indian IT stocks are not interchangeable. Build a company-specific view of where growth comes from and how resilient that growth would be if one customer, region or service line weakened.
Break down revenue by service, geography and industry
Use the categories the issuer discloses. A broad mix across service lines, countries and industries can reduce dependence on one source of demand, while a narrow mix can make results more volatile. Do not infer diversification from a broad corporate description if the reported revenue is concentrated in a few segments.
Measure client concentration and contract dependence
Check the share of revenue from the largest customers and whether management discusses renewals, cancellations or unusually large contracts. A major deal can lift growth for a period but also increase future execution risk. Test whether growth remains healthy after excluding the biggest customer or the largest reported win.
Follow operating margins and delivery efficiency
Relate margin changes to employee costs, subcontractors, travel, pricing, currency and utilisation. A company can grow revenue while margins fall because it is investing ahead of demand or discounting to win work. Determine whether management presents a credible path to recover or sustain profitability.
Examine bookings and order commentary carefully
Deal value, order book and bookings are leading indicators, not the same as recognised revenue. Find out the expected conversion period, cancellation terms and whether the figure includes extensions or renewals. Compare bookings with subsequent revenue and cash collection over time.
Use workforce disclosures as capacity signals
Review headcount, attrition, hiring, subcontractor use, employee costs, training and the skills management says it needs. Capacity constraints can limit growth; rapid hiring can pressure margins before new work is productive. Always read the company’s definition of utilisation and the population included.
Treat AI claims as hypotheses to verify
AI is a specific diligence topic, but a headline about AI demand does not establish an investment case. Determine what clients are actually buying, whether the company reports recognised revenue or only pipeline and bookings, and whether AI work improves margins or increases pricing pressure and investment.
Check the skills, training, data-centre or software spending and subcontracting needed to deliver the work. Infosys’s FY2026 Form 20-F says AI is reshaping the technology industry and identifies wage pressure and the hiring of employees and subcontractors as potential risks to competitive advantage and profits. That is an issuer-specific disclosure, not evidence that every Indian IT company faces identical exposure.
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As an example of why definitions matter, Infosys reported billable IT-services professional utilisation of 81.1% including trainees and 84.4% excluding trainees for fiscal year 2026. Those figures are company-specific operating metrics, not a sector benchmark, target or buy/sell threshold. Use them only with the company’s stated definition and comparison period.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Value the business and the price separately
SEBI recommends reviewing the latest price and volume, historical data, corporate announcements, the price-to-earnings ratio and an estimate of intrinsic value. The regulator does not set a universal acceptable P/E, growth rate, debt level or margin threshold.
Use a relative and an intrinsic view
Compare today’s valuation with the company’s own history and with genuinely comparable companies. Adjust for growth, profitability, balance-sheet strength, client concentration, accounting differences and business mix. A lower P/E can reflect weaker prospects or higher risk rather than a bargain.
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For an intrinsic estimate, state your assumptions about revenue growth, margins, cash conversion, reinvestment, terminal growth and the discount rate. Test how the conclusion changes if growth is slower, margins compress or the currency moves against the company. Present a range rather than pretending that one precise value is known.
Read price and volume in context
Recent price strength can reflect results, expectations, sector sentiment or liquidity. Check historical prices and volumes alongside announcements instead of treating a chart pattern as evidence of business quality. Avoid using a single ratio or a recent rally as the investment thesis.
Compare two Indian IT companies on like-for-like axes
Before ranking companies, reconcile their segment definitions and reporting periods. Then compare the following dimensions:
| Comparison axis | Questions to answer |
|---|---|
| Revenue growth and source | Is growth broad-based across services, industries and regions, or driven by one contract or acquisition? |
| Operating margin and cash conversion | Are margins stable, and does operating cash broadly follow reported profit? |
| Balance sheet and working capital | How much debt and lease exposure exists, and are receivables or contract assets rising unusually fast? |
| Client, sector and geography concentration | Would the loss or slowdown of one customer, industry or country materially change results? |
| Workforce capacity | What do utilisation, attrition, hiring, subcontracting and skills disclosures imply about delivery capacity and cost? |
| Valuation | How does the price compare with the company’s history and relevant peers after adjusting for quality and risk? |
| Reliance on expectations | How much of the thesis depends on forecasts, bookings or AI potential rather than recognised results? |
A practical pre-investment workflow
- Write a one-paragraph business summary. State what the company sells, who pays, where it operates and its main competitors.
- Collect the latest annual report, two or more years of financial statements, quarterly results and exchange filings. Include corporate announcements and segment notes.
- Create a trend sheet. Record revenue, operating profit, margins, net profit, operating cash flow, debt, cash, receivables, headcount and any disclosed utilisation measure.
- Mark concentration risks. Note major customers, industries, geographies, service lines and unusually large deals.
- Challenge the growth story. Separate recognised revenue from pipeline, bookings, management targets and AI possibilities.
- Estimate value with explicit assumptions. Compare the result with historical and peer valuation while documenting accounting differences.
- Run a downside case. Model slower growth, lower margins, delayed collections, higher wage costs or the loss of a major customer.
- Check portfolio fit. Decide the position size only after considering diversification, liquidity, taxes, fees and your ability to withstand a substantial loss.
- Record the thesis and disqualifiers. Write what must remain true and which future disclosure would make you reduce or exit the position.
Red flags that require extra work
- Profit growth without comparable operating-cash growth.
- Rapid receivables or contract-asset increases without a clear collection explanation.
- Margin improvement based mainly on one-off items, currency gains or changing definitions.
- Heavy dependence on one customer, geography, industry or large contract.
- Bookings or AI claims presented prominently while recognised revenue remains weak or unreported.
- Frequent changes in segment or KPI definitions that make comparisons difficult.
- Management commentary that conflicts with audited statements, filings or subsequent results.
- Debt, lease or working-capital obligations that are easy to miss in headline summaries.
Use safeguards and reliable learning material
Keep account and transaction records, understand all fees and charges, and avoid decisions based on unsuitable tips or schemes that promise easy returns. SEBI recommends consulting a SEBI-registered investment adviser when your needs call for individualised guidance. An adviser can incorporate your goals, tax position, existing holdings and risk capacity—factors a general checklist cannot determine.
If you want foundational reading, SEBI provides a Financial Education Booklet and other investor-learning materials through its education resources. A search for an “Indian stock market investing book” may produce commercial options, but verify the author, edition, costs and regulatory context; free regulator material is a useful starting point.
Quick Recap
Final decision checklist
- I can explain the company’s products, customers, competitive position and demand drivers.
- I reviewed at least two years of income-statement, balance-sheet and cash-flow data.
- I checked cash conversion, margins, debt, working capital and one-off items.
- I read the latest annual report, quarterly results and exchange announcements.
- I tested service mix, geography, industry, customer concentration, deal commentary and workforce capacity.
- I verified whether AI or other growth claims are recognised revenue, bookings or only expectations.
- I compared valuation with relevant history and peers without relying on a universal ratio cutoff.
- I assessed liquidity, diversification, taxes, fees and my capacity to absorb a loss.
- I know which future facts would invalidate my thesis.
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