Investors in shares of information technology (IT) companies continue to search for demand tailwinds after the June quarter (Q1FY26) earnings disappointed even amid low revenue growth expectations. The ongoing global macroeconomic instability due to tariffs is a deterrent for discretionary IT spending, causing further delay in clients’ decision-making cycles.
Plus, with companies appearing to have exhausted important margin levers, weak demand could now weigh on profitability. A tight leash on costs and efficiency improvement measures have been used to cushion margins until now.
Margin pressures
In 1QFY26, out of 15 large- and mid-cap IT companies, 60% missed on margin estimates (last quarter: 33% missed), with some noting incremental margin pressure ahead, said BNP Paribas Securities India. While 53% exceeded consensus revenue growth estimates in Q1FY26 versus 20% in Q4FY25, it is hardly a consolation as the forecast was already beaten down.
While dealwins were robust in Q1FY26, they were mostly led by cost-takeout projects, which are typically margin-dilutive. Without arecovery in discretionary spending, increased reliance on cost take-out projects could become a margin headwind.
As clients eye saving costs amid volatility, supply-chain disruptions, and sticky inflation, deals are likely to remain skewed towards cost-takeouts/ vendor consolidation. This means while deal inflow may continue, margin may be causality.
“Cut in consensus margin estimates across most consumer/tariff-facing S&P 500 sectors over the past six months reflect ensuing cost pressures on end clients. Besides, the rising probability of a Fed rate cut (likely limited effect of tariff on inflation) implies that the market expects companies to absorb most of the tariff increase,” pointed out JM Financial Institutional Securities. This could further squeeze IT services spending.
Deferral of wage hikes and muted hiring/restructuring to counter demand-supply mismatch are other indications of mounting margin pressures. Tata Consultancy Services Ltd announced layoffs, HCL Technologies Ltd is adjusting talent deployment outside India, with a specific ramp down in Automotive ER&D, and Wipro Ltd booked a restructuring charge in Q1FY26 related to severance payments in Europe.
Headcount growth is expected to be slow as ramp-up for several large cost-take-out deals, which usually require large upfront investments, is likely to start in H2FY26. On the other hand, deal ramp-up would aid earnings growth in H2FY26 over H1FY26, according to the management of some tier-1 IT companies.
Challenging environment
Still, after Q1FY26, concerns are emerging whether this expectation will actually materialize as the sector battles both demand and margin challenges.
While Infosys Ltd and HCL raised the lower end of their FY26 revenue growth guidance, the latter cut its Ebit (earnings before interest and taxes) margin guidance to 17-18% from 18-19%.Tier-2 IT companies continued to do relatively better than tier-1; however, due to client/company-specific challenges, there is a rising divergence now even among tier-1 revenue growth performance. This could make gauging revenue outlook trickier.
Moreover, there is a growing disconnect between US macros (a key market for Indian IT companies) and Indian IT growth. “Recent financial results for top US corporations (clients of India IT) reflect a very strong business environment. We believe many of these corporate clients—despite a healthy financial performance—are unsure about the macro environment given tariff uncertainty and firms holding back investments,” said a report by HSBC Securities and Capital Markets (India).
Note that the Nifty IT index is down 18% so far in 2025 compared to positive returns of the benchmark Nifty 50 index. Sure, valuations of IT stocks have moderated, but that’s not compelling since revenue visibility for the remainder of FY26 is still bleak.
