The Indian IT services landscape is bracing for a turbulent fiscal year in FY26, primarily driven by rising regulatory pressures and economic uncertainties stemming from the policies of the US administration under Donald Trump. Industry experts suggest that a freeze in IT budgets by corporate clients, coupled with these uncertainties, might hinder the sector’s recovery and growth trajectory.
Impact of Proposed Tariffs on IT Spending
Trump’s proposed tariffs, which are designed to bolster American manufacturing, could inadvertently affect major clients of Indian IT companies within the United States. This may lead to a decline in technology expenditures, which is vital for sustaining growth in the sector.
- Key Concerns:
- Increased costs for US businesses
- Higher expenses for equipment sourcing
- Potential cuts in large-scale transformation projects
Research firms like Kotak Institutional Equities and Motilal Oswal Financial Services estimate that leading Indian IT players—Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro, and Tech Mahindra—may see only up to 5% constant currency revenue growth in FY26. Meanwhile, JM Financial has revised its growth forecast down to 5.8%, a decrease from the previously projected 7.8%.
Demand Recovery and Inflation Concerns
A report from Prabhudas Lilladher highlighted that while there was a gradual recovery in demand until Q3 FY25, the landscape could shift dramatically due to inflation-driven trade policies. These changes may compel global enterprises to reassess their budget allocations.
According to a Kotak Institutional report dated March 13, the ramifications of tariff threats from the US could lead to a slowdown and widespread uncertainty in IT spending. They warn that the estimates for FY2026 may mirror or even fall below those of FY2025.
Earnings Reports and Revenue Projections
These downward revisions come just ahead of the eagerly anticipated Q4 FY25 earnings announcements, with TCS set to unveil its results on April 10. Following TCS, Infosys and HCLTech are expected to release their earnings on April 17 and April 22, respectively.
- Q4 Revenue Forecasts:
- Projected drop of up to 1.3% sequentially
- Best-case scenario indicates a minimal 0.3% growth
- Seasonal weaknesses and ongoing constraints on discretionary spending are likely to impact profit margins.
A recent report by Jefferies anticipates that the overall revenues for the IT services sector will experience a 0.4% decline quarter-on-quarter in constant currency terms, although year-on-year figures may show a 4.3% increase.
Navigating Challenges in the IT Sector
The Jefferies report also noted that revenue growth in Q4 is expected to be affected by seasonality, deal ramp-downs, and slower-than-anticipated recovery from furloughs. Predictions indicate that TCS, Infosys, and HCLTech may achieve around 5% growth in constant currency for FY25, while Wipro’s growth forecast ranges from -1% to 1%.
Despite these obstacles, industry analysts remain optimistic about growth opportunities within the IT sector, particularly in the realm of artificial intelligence. The sector’s resilience may hinge on its ability to adapt to changing market dynamics and leverage emerging technologies for future expansion.
