IT Sector Update : Muted Q4FY25; Guidance implies modest growth in FY26E by Choice Broking Ltd
In Q4FY25, all large-cap Indian IT services companies reported sequential revenue degrowth—the first such occurrence since Q1FY21, which was impacted by the COVID-19 pandemic. This softness was driven by delayed project ramp-ups, underperformance in selected verticals, and weakened demand due to tariff war. In response to the uncertain environment, Tier-I IT players have lowered their FY26E revenue guidance band by 1%, with the lower end factoring in continued demand weakness and the midpoint assuming the closure of key large deals under current macro conditions. While TCV across firms remained healthy, most wins were skewed towards cost-optimization engagements rather than transformational or large-scale deals. We expect IT services companies to post modest growth in FY26E, constrained by cautious client spending and a challenging demand environment. Tier-I players are expected to grow in the range of -2.2% to 4.0%, while mid-tier firms are likely to outperform with growth of 5% to 28%.
Margins to remain steady despite headwinds
Profitability remains under pressure due to sluggish revenue growth, elevated operating costs, & rising wage inflation. While most IT firms have already deployed conventional margin levers, there remains scope to optimize SG&A expenses and subcontractor costs. Potential deferral of wage hikes and a reduction in variable pay could also support margins. However, these tailwinds may be partially offset by pricing concessions and elevated marketing spends. Overall, we anticipate margins to remain in narrow band in FY26E.
Moderate growth outlook; Tariff uncertainty limits upside
Vertical-level performance is expected to remain uneven in FY26E. Financial Services and Energy & Utilities are poised for growth, while Manufacturing, Retail, and CPG may lag due to continued pressure on tech budgets. H1FY26E is likely to remain soft; posing challenges to meet full-year targets, especially as H1 typically sees stronger momentum. A key near-term catalyst is the recently announced trade agreement between the US & China, which includes tariff reductions. This could offer a temporary demand uptick, particularly around supply chain reengineering, providing a tactical opportunity for Indian IT services. However, concerns around macro uncertainty, client cost focus, and uneven demand recovery persist, keeping large-cap growth expectations in low single digits.
Valuation: Reasonable amid selective optimism
The Nifty IT Index has outperformed the broader markets by 2.2% over the past month, driven by renewed optimism following the USChina trade agreement. We remain constructive on firms with diversified portfolios catering to both costs takeout and discretionary IT spending. Within large caps, we favor TCS and Tech Mahindra for their balanced exposure and execution strength. In the mid-cap space, Coforge stands out for superior growth prospects and margin resilience.
For Detailed Report With Disclaimer Visit. https://choicebroking.in/disclaimer
SEBI Registration no.: INZ 000160131
