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We expect IT Services companies to commence the year on a subdued note in FY26, owing to weak discretionary spending, slower decision making, and cautious approach by clients, amid the macro and geopolitical uncertainty and AI-led tech disruption. Muted sequential revenue growth in Tier-1 companies is expected to result in a slowdown, to low single-digit growth or even a decline on YoY basis, in CC terms. The BFSI recovery trend continued in Q1. The imposition of reciprocal tariffs by the US will impact spending in Manufacturing, Logistics, and Retail. Given this backdrop, QoQ growth is expected to remain muted in Q1, while the weakening USD would lead to 90-220bps cross currency benefits on reported USD revenue growth. Except INFO and LTIM, all Tier-1 players are expected to report muted CC QoQ revenue growth in Q1. Tier-2 companies are expected to see a divergence in growth performance, with COFORGE, PSYS, and ECLX likely to report strong sequential revenue growth, while BSOFT, CYL, and LTTS would register muted growth. Easing of global trade tension, Isarel-Iran ceasefire, and potential interest rate cuts in the US suggest some stability returning in the macro and geopolitical situation. This is likely to improve the overall sentiment and the decision-making cycle, driving some uptick in tech spending. The NIFTY IT index underperformed the broader markets by 2.9% in the last 3M due to elevated macro uncertainties and risks of earnings downgrade. We downgrade HCLT and TechM to REDUCE from Add (refer to Exhibit 6 for change in our estimates).

Softening growth in Q1; BFSI continues to shine

IT Services firms are likely to post another soft quarter, with continued caution around discretionary spending, delayed decision-making, and tighter project scrutiny weighing on deal ramp-ups and execution. Reported USD revenue may see modest QoQ growth, supported by currency tailwinds from a weakening USD against major global currencies such as the EUR, GBP, and Rupee. Tier-1 companies, except INFO and LTIM, are expected to report muted constant currency sequential revenue growth in Q1. Tier-2 companies are expected to see a divergence in growth performance, with COFORGE, PSYS, and ECLX likely to lead sequential revenue growth in Q1, while BSOFT, CYL, and LTTS would report muted growth. Tier-1 players are expected to post CC revenue growth of -2% to 2%, while reported USD revenue growth would be aided by 90–220bps cross-currency tailwinds. Tier-2 companies may see CC revenue growth of -2.5% to 7%, with tailwinds of 40–210bps on reported USD revenue. Among verticals, BFSI continues to show encouraging signs, while Communication and Manufacturing (particularly Auto) remain weak. Growth trends continue to be mixed across all other verticals like Hi-tech, Retail, and Healthcare. Performance of ER&D companies is likely to be impacted by the slowdown in Auto and the tariff-related uncertainties. We expect INFO and HCLT to narrow their FY26 revenue growth guidance to 1-3% CC YoY and 3-5% CC YoY, while retaining their EBITM guidance of 20-22% and 18-19%, respectively. We expect WPRO to give guidance of -1% to +1% growth for Q2FY26E.

EBITM to remain largely steady

IT companies under our coverage are expected to report a mixed performance on margins, contingent on salary hike (INFO: mid-to-senior level; ECLX), higher travel costs (visa-related), pressure on utilization due to muted revenue growth, and business mix changes. Tier-1 companies, except LTIM and TECHM, are expected to log broadly stable margins sequentially. Mid-cap companies may experience a wider margin fluctuation, ranging from -300bps to +50bps.

Key monitorables

i) FY26 revenue/margin guidance; ii) CY25 IT budget and impact on client spending behavior amid macro uncertainties; iii) recovery in discretionary spending; iv) deal intake and pipeline; v) pace of decision-making, project deferment/cancellation, and any clientspecific ramp-downs; vi) demand trends in key verticals like BFSI, Retail, Manufacturing, Hi-Tech, Communications; vii) pricing environment; viii) headcount change owing to constrained macro indicators and productivity gains from AI; and ix) adoption and integration of Gen AI across workstreams.

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