Better growth for the Big Five of India’s IT industry in the next financial year has come under doubt, with some of the largest banks, the biggest customers of homegrown IT firms, putting large tech spending projects on hold. The reason: Uncertainty over inflation rates and whether America’s recent tariffs on goods from China and Mexico could start a new round of trade war.
After meeting company executives, at least two brokerages including JM Financial Institutional Securities Ltd and Kotak Institutional Equities last week red-flagged some challenges that could dampen growth for the country’s $283 billion IT industry. Optimism also weakened after Capgemini SE guided last month that the French IT services firm will experience no organic growth in the current calendar year.
Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, and Tech Mahindra Ltd had $78.03 billion in revenue last year, or about 30% of the country’s IT industry.
“IT Services’ 3QFY25 results were, in general, marginally better than expectations…3Q results, however, appear a distant memory now. Uncertainty has crept in the economic outlook since. Trade war seems imminent. Recalcitrant inflation has pushed out fed rate cut hopes and plunged consumer confidence in the US. Such uncertainty is anathema to IT Services demand,” JM Financial analysts Abhishek Kumar and Nandan Arekal wrote in a note dated 26 February, titled “Cloud (of the wrong variety) on the horizon?”
“In our recent interactions with IT services players, we picked up sporadic instances of pause in transformation programs by large US banks. This, if spreads, could put Street’s (and ours) FY26 growth estimates at risk. Our estimates and TP (target prices) are unchanged for now as we seek more evidence, but will advise flight to safety, that is, stocks with earning resilience and valuation buffer,” wrote analysts at the domestic brokerage JM Financial.
Banks are the biggest clients of homegrown IT firms. In the quarter ended December, banks, along with insurance firms and capital markets, accounted for 31.7% of business at TCS, 27.8% for Infosys, 20.3% for HCL Technologies, 34.1% for Wipro, and 16.1% for Tech Mahindra.
On 18 February, Capgemini reported that its revenue in December 2024 declined 1.9% to about $23 billion. However, according to JM Financial analysts, the company expects no organic growth when the French IT firm outlined that its revenue in 2025 could fall by 2% or improve by 2% in constant currency terms.
Constant currency does not take into account exchange rate fluctuations.
Modestly better growth likely
“FY2026E growth across most companies is likely to be modestly better than FY2025E, yet below the normalized levels due to (1) a slower-than-expected recovery in discretionary spends, (2) uneven recovery in a few verticals (especially hi-tech) and (3) possible disruption from AI adoption of enterprises,” Kotak analysts Kawaljeet Saluja, Sathishkumar S., and Vamshi Krishna wrote in a note, dated 3 March.
Kotak analysts noted that at the brokerage’s recent conference, executives from 23 companies pointed to ‘uneven spending recovery’ across verticals because “a broad-based recovery is still elusive in other key sectors, such as healthcare, manufacturing, telecom and hi-tech”.
“Mega deals were sporadic in CY2024, and our initial assessment does not indicate much improvement in CY2025,” wrote analysts at Kotak.
TCS, which does not give guidance, reported a 4.6% dollar revenue growth from April to December. The country’s largest IT services firm grew at 4.1% last year. Infosys expects an at-best 5% growth in constant currency terms this fiscal year compared to 1.4% growth last year.
HCLTech expects 5% in constant currency terms this fiscal year, similar to last year. Wipro expects its full-year revenue to decline by 1%, which is better than last year’s decline of 2.2%. Finally, Tech Mahindra’s revenue in the April-December period has slipped 0.3% compared to the year-ago period. In April-March 2024, Tech Mahindra’s full-year revenue declined 5%.
Last month, Nasscom, the IT industry body, said it expects the Indian IT industry, estimated to end with $283 billion in revenue in March, to cross $300 billion next year, translating to a 6% growth.
Tough amid uncertainties
A third analyst said that considering the Indian IT industry is estimated to grow 5.1% in the year ending March 2025, better growth next year due to these macroeconomic uncertainties looks tough.
“We expect a few big companies, including Infosys and HCL, to grow 6% (FY26), but TCS, Wipro and Tech Mahindra would probably grow slower,” said an analyst at a foreign brokerage. “These are early days, but to expect the industry to grow faster next year appears to be getting tough,” the analyst said on the condition of anonymity.
Beyond the macroeconomic uncertainty and policy decisions, homegrown IT firms run the risk posed by artificial intelligence tools.
“In our opinion, the deflationary forces of generative AI will likely occur at the time of renewals when there is generally pricing pressure on IT services contracts and generative AI could add even more pressure,” Keith Bachman, an analyst with Toronto-based BMO Capital Markets, wrote in a note dated 12 December.
In its latest note, Kotak analysts also underlined that “GenAI will benefit challengers while incumbents face a challenge to adapt.”
