Tariffs, Delays, and Caution: Will Indian IT Survive the Global Jitters?

India’s leading IT services companies posted a subdued performance in the March quarter (Q4FY25), marking the first sequential revenue decline in constant currency terms since June 2020, according to a report by Kotak Institutional Equities. The downturn was attributed to delays in project ramp-ups, cautious client spending, and macroeconomic uncertainties, especially in the lead-up to reciprocal tariff announcements by global governments.

Manufacturing and Retail Verticals See Steep Declines

The report highlights that the manufacturing and retail verticals were most impacted, showing sharp revenue declines. In contrast, the BFSI (Banking, Financial Services, and Insurance) segment demonstrated resilience, maintaining steady revenue contributions.

Retail, consumer goods, logistics, travel, and manufacturing continue to be highly vulnerable to project delays, cancellations, and discretionary spending cuts — primarily due to the US government’s tariff measures.

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Revenue Growth Slows to Low Single Digits; Demand Weakens

Year-on-year revenue growth fell to low single digits across most companies. While headcount increased, indicating firms were preparing for future demand, actual demand weakened in the latter half of the quarter.

Despite the weak topline, EBIT margins improved year-on-year for all major IT players — except TCS — thanks to rupee depreciation, cost controls, and adjustments in variable pay. Some firms also reported better realisation rates.

Mid-Tier IT Companies Outperform Larger Rivals

While industry giants struggled, mid-tier IT firms such as Persistent Systems and Mphasis posted strong March quarter results. Kotak anticipates that this segment may outperform larger firms in the coming quarters, benefiting from a favorable revenue mix and lower exposure to deflationary risks posed by new technologies.

Vertical-Specific Outlook: BFSI and Energy Remain Strong, Others Cautious

The spending outlook remains mixed across key verticals:

• Telecom, hi-tech, and healthcare: Clients are cautious amid macro uncertainty, leading to slower decision-making and revenue pressure.
• BFSI and Energy & Utilities (E&U): These verticals continue to show strong demand and a healthy spending outlook.

Firms with high exposure to the US market, discretionary spending, and vulnerable verticals like retail and manufacturing are expected to face greater headwinds.

Margin Pressure Ahead; Cost Controls Key to Sustain Profitability

Kotak warns that the industry may be entering a challenging phase where margin expansion is difficult. With most cost levers exhausted, companies may have to resort to cutting employee compensation or deferring bonuses and raises to maintain profitability.

Outlook for Q1FY26: A Mixed Bag

Traditionally a strong quarter, Q1FY26 will be crucial for Indian IT companies. According to Kotak:

• Wipro expects a sequential revenue dip due to macro challenges.
• Capgemini and Cognizant maintain a stable growth outlook in line with earlier forecasts.
• Mega deals remain rare, and despite a strong pipeline, large deal conversions may face delays due to ongoing uncertainties.

Indian IT companies are bracing for a period of slower growth, rising margin pressures, and delayed client spending. While mid-tier players are showing signs of resilience, the broader industry will need to focus on cost efficiencies and strategic client wins to navigate the challenges ahead.