Tariff Tensions and Weak Macro Backdrop Cloud FY26 Outlook for Tier-I IT Companies

Large-Cap IT Firms Face Revenue, Margin Strain Amid US Trade Actions, RBI Alerts, and Global Caution

India’s Tier-I IT services companies are bracing for a subdued earnings season in Q4 FY25, as a combination of seasonal headwinds, slowing global demand, and rising trade tensions weigh heavily on revenue and profitability. Industry analysts and brokerage reports project a sequential decline in earnings for most large-cap IT firms, while Tier-II players are expected to outperform, capitalising on better execution and legacy deal wins.

The situation has become further complicated by renewed geopolitical uncertainty, particularly around new US reciprocal tariffs that came into effect on April 9, under the administration of former US President Donald Trump. These tariffs have stoked fears of a reignition of trade wars, prompting cautious spending behaviour among global enterprises.

• Tier-I IT earnings seen under pressure in Q4 FY25

• FY26 growth may remain flat or fall short of FY25 levels

• US tariffs and macro risks triggering client caution

• Mid-cap IT firms expected to sustain revenue outperformance

Revenue Outlook: Street Prepares for Sequential Decline

Multiple brokerages are forecasting a drop in sequential revenue growth for the March 2025 quarter for Tier-I IT firms. This weakness is driven by the seasonal impact of fewer billing days, account-specific delivery issues, and a broad deterioration in demand, particularly from clients in the retail, healthcare, and manufacturing verticals.

Overall, constant currency (CC) revenue growth is expected between -1.5% and flat for large-cap names like TCS, Infosys, HCLTech, Wipro, Tech Mahindra, and LTI Mindtree. While BFSI continues to provide some buffer, discretionary project delays and deferred enterprise budgets are limiting upside.

• Sequential revenue decline of -1.5% to 0% expected

• Macroeconomic drag impacting demand pipelines

• Muted Q4 performance reflects client hesitancy and soft vertical demand

Margin Trends Diverge: Wage Hikes and Tariffs Create Volatility

Margin performance across Tier-I companies is expected to remain mixed due to a combination of employee cost pressures, seasonal variability, and uncertainty over US tariffs. On a year-over-year basis, EBIT margin expansion is expected for most large IT firms—except for TCS, where wage hikes and muted revenue growth are expected to weigh on profitability.

Brokerages like Nirmal Bang and Kotak Institutional Equities have cited that internal cost inflation, due to talent retention, training, and promotions, will offset some of the gains from INR depreciation and operating efficiencies.

• Wage hikes may compress Q4 margins for TCS

• Y-o-Y EBIT margin expansion expected for most peers

• INR depreciation provides some relief for Tier-II firms

FY26 Guidance at Risk: Analysts Flag Growth Revisions and Trade War Threats

The outlook for FY26 has turned increasingly cautious. With global clients in a “wait and watch” mode amid fresh trade uncertainties, analysts expect FY26 revenue growth to mirror or underperform FY25 levels. Many IT clients are holding back discretionary tech budgets as they await further clarity on US policy direction and inflationary pressures.

Brokerages are trimming USD revenue growth estimates by 0–5 percent across their IT coverage universe. A key factor behind this revision is the dampening impact of US trade policy, which could delay spending cycles and suppress deal closures. Several firms have now moved to benchmark valuation models against 10-year historical averages instead of more bullish 3- or 5-year trends, indicating lower long-term growth expectations.

• FY26 growth may fall short of FY25 if trade frictions persist

• USD revenue growth assumptions cut by 0–5%

• Cautious client behaviour affecting deal ramp-ups and renewals

Tier-II IT: Persistent, Coforge and LTTS Continue to Outperform

In contrast to the Tier-I pack, Tier-II IT firms are expected to report relatively robust results for Q4 FY25. Companies such as Persistent Systems, Coforge, and LTTS are projected to deliver organic constant currency revenue growth of 0–6 percent, benefiting from large deal wins in prior quarters and deeper client engagements in niche verticals.

These firms are also expected to see stronger EBIT margin expansion, supported by INR depreciation, improved utilisation, and tight cost management. The market is rewarding this outperformance, as evidenced by valuation premiums for Tier-II stocks.

• Persistent, Coforge, and LTTS lead Tier-II growth

• Strong execution and deal flow boost mid-cap momentum

• Mid-caps benefit from leaner cost structures and deeper vertical plays

Valuation and Top Picks: Defensive Strategy in Play

Following a sharp 26 percent correction in the Nifty IT index so far in CY2025, analysts suggest that valuation multiples for Tier-I firms have reverted to long-term averages, making room for potential upside if macro conditions stabilise. Assuming no global recession, long-term USD revenue growth of 5–7 percent is currently priced into most Tier-I names.

Among Tier-I, TCS, Infosys, and HCLTech remain top picks due to strong balance sheets, solid order books, and relative resilience to macro shocks. In Tier-II, Coforge continues to receive positive sentiment on account of diversified verticals and healthy execution visibility.

• Valuations now reflect long-term growth averages

• TCS, Infosys, HCLTech top large-cap picks

• Coforge leads mid-cap recommendations

RBI MPC Signals Trade Friction Risk to Inflation and Growth

Echoing market concerns, RBI Governor Sanjay Malhotra flagged trade-related frictions as a major risk during the April 9 Monetary Policy Committee meeting. He noted that protectionist policies could dent global growth, slow down cross-border investments, and pose new inflationary risks—indirectly referencing the newly imposed US tariffs.

This acknowledgement from the central bank further reinforces the cautious stance adopted by Indian IT firms in their guidance for FY26, as macroeconomic uncertainty continues to dictate client sentiment and revenue visibility.