Tariff War, Weak Demand Rattle Indian IT: Q4FY25 Turns Soft, Outlook for FY26 Stays Muted

India’s IT services industry is navigating choppy waters as all major Tier-I firms reported sequential revenue decline in Q4FY25—a trend last seen during the COVID-hit Q1FY21. According to a sector review by Choice Broking, delayed ramp-ups, selective vertical weakness, and demand headwinds—aggravated by a global tariff war—dampened performance.

Even as deal wins remained robust across the board, most new contracts were geared toward cost optimization rather than discretionary transformation projects, indicating client caution.

Muted Growth Expectations for FY26
Tier-I companies have trimmed their FY26 growth guidance bands, factoring in persistent macro risks. The report projects Tier-I players will see revenue growth in the narrow range of -2.2% to 4%, while Tier-II firms are expected to outperform with growth between 5% and 28%. Notably, Coforge leads the mid-tier pack with a record $2.1 billion TCV win in Q4, bolstered by the Sabre mega deal.

Margins Pressured but Stable
While profitability remains under stress due to soft revenues and cost inflation, firms are actively leveraging SG&A optimizations and trimming variable pay. These levers, coupled with potential wage hike deferrals, are expected to help margins stay within a narrow band in FY26. However, pricing concessions and elevated marketing spend could limit upside.

Among verticals, BFSI showed relative resilience, barring Infosys and LTIM. In contrast, manufacturing, retail, and healthcare continued to underperform due to policy headwinds and low tech spending in the U.S. Meanwhile, ER&D firms reported mixed results—with KPIT and LTTS growing modestly while Tata Elxsi and Cyient struggled.

Hope Rides on Tariff Certainty and H2 Recovery

A key potential catalyst is the recent U.S.-China tariff détente, which could revive tech demand temporarily, especially in supply chain reengineering. However, the report warns that demand will remain lopsided and client caution elevated, especially in H1FY26. A meaningful recovery is expected only in H2FY26, contingent on deal conversions and macro stabilization. Despite muted short-term growth, IT valuations remain reasonable. Analysts favor firms with balanced portfolios and strong execution. Top picks include Tech Mahindra—which posted robust FY25 deal momentum—and Coforge, which is benefiting from acquisitions and strong cross-selling.
 
Read This Also: Can RBI’s Rate Cuts and Liquidity Push Jumpstart India’s Economy?