Indian domestic technology companies reported another soft performance in the March quarter, led by select cases of delays in project ramp-ups and a cautious spending stance adopted by a few verticals in the run-up to the reciprocal tariff announcement.
Companies also remained cautious that growth would be a challenge in the coming quarters amid potential headwinds in developed economies. All large IT services companies reported a sequential revenue decline in constant currency terms in Q4FY25 — a first since the June 2020 quarter, said domestic brokerage firm Kotak Institutional Equities in its latest report.
According to the brokerage, the decline was sharp in manufacturing and retail verticals, while revenues from the financial services vertical held up well.
It stated that revenue growth slowed on a year-on-year basis across companies, falling to low single digits. Headcounts increased across firms, indicating they were building up capacity for growth but faced a deterioration in demand toward the latter half of the quarter.
On the margins front, the brokerage said all large IT companies, except TCS, reported a year-on-year increase in EBIT margin and stable margins on a quarter-on-quarter basis. A combination of rupee depreciation, aggressive expense management, and potential adjustments in variable compensation helped. Select companies also reported an increase in realisation.
While large companies struggled during the quarter, mid-tier companies such as Persistent reported strong performance in the March quarter. Mphasis also delivered good revenue numbers, prompting the brokerage to expect the mid-tier pack to outperform larger companies on growth, driven by a favourable revenue mix and lesser concern over deflationary risks from new technologies.
Retail and manufacturing under pressure
Retail, consumer, logistics, travel, and manufacturing verticals are the most impacted due to tariff imposition by the US government and are highly vulnerable to project delays, cancellations, and cuts to discretionary spending, the brokerage noted.
The spending outlook is mixed across telecom, hi-tech, and healthcare. Clients continue to adopt a cautious stance, partly due to higher macro uncertainties. It is reasonable to expect a slowdown in decision-making and revenue pressure in these verticals. BFSI and Energy & Utilities (E&U) continue to have a healthy demand outlook.
The brokerage expects firms with higher exposure to manufacturing and retail verticals, discretionary spending, and the US market to face stronger headwinds as demand slows down.
According to Kotak, tech companies are entering a tough phase where margin expansion will be difficult, and the only options left are cutting employee compensation or deferring raises/bonuses, as most other levers have already been exhausted.
Focus shifts to 1QFY26; mixed outlook from companies
The brokerage said that Q1FY26 is seasonally strong for IT services companies. A weak Q1 will be difficult to offset unless there is a ramp-up in cost take-out deals. The outlook for the June quarter is mixed. Wipro indicated an impact on sequential revenue growth due to higher macro uncertainties.
However, the outlook from Capgemini and Cognizant indicates no significant deterioration in expected growth in Q1 compared to the start-of-year expectations.
Kotak also observed that although recent deal wins have been driven by cost-saving priorities, mega deals remain rare, and uncertainties could delay large deal conversions despite a strong pipeline at firms like HCL Tech and LTIMindtree.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
