How Trump world poses trouble for India’s tech firms

Kotak Institutional Equities and Motilal Oswal Financial Services expect Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, and Tech Mahindra Ltd to report a 5% constant currency revenue growth at best in FY26, whereas JM Financial expects them to report a growth of 5.8% at best, lower than its previous estimates of 7.8% at best. Earlier, IT industry lobby Nasscom had projected a growth of at least 6% in FY26, against 5.1% growth it estimated for FY25.

The revision by analysts comes just days before these companies report their FY25 earnings. TCS kicks off the earnings season for IT on 10 April, followed by Infosys and HCLTech on 17 and 22 April, respectively. The Big Five get between $3 billion and $16 billion of their full-year revenue from the Americas, translating to almost half of their overall revenues.

Trump tariffs threat

“The fallout of tariff threats by the US is slowdown and uncertainty in spending,” Kotak Institutional analysts Kawaljeet Saluja, Sathishkumar S., and Vamshi Krishna said in a 13 March note. “Noting the uncertainty, FY2026E could end up similar to FY2025E or even lower in growth,” the analysts said.

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Trump has vowed a range of import tariffs to boost American manufacturing, but they also make it tougher for US companies as sourcing equipment becomes more difficult. This results in large companies, which are clients of IT service providers, holding back their tech spending and putting brakes on large transformation projects that bring a chunk of revenue to homegrown IT outsourcers. Besides, retaliatory tariffs threaten to raise prices further and delay interest rate cuts, keeping costs elevated for business.

A second brokerage echoed a similar opinion.

“The consequence of the US imposing tariffs, along with retaliatory response from key markets and geographies, will be detrimental to the IT services sector,” said Prabhudas Lilladher analysts Pritesh Thakkar and Sujay Chavan in a note dated 27 March. “Until Q3FY25, gradual recovery in demand was visible within certain pockets; however, all this could change quickly with inflationary trade policies further escalating uncertainties among global enterprises, and requiring them to revisit budgetary spends,” said the Prabhudas Lilladher analysts.

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Mumbai-based TCS does not give guidance, but even if it does not report any growth in the fourth quarter, it would’ve logged 4.6% growth, given its performance in the first nine months of FY25. Infosys and HCLTech are expected to grow 5% at best in constant currency terms in FY25. Wipro’s management hinted at -1% to 1% growth for the full year in constant currency terms; better than FY24 when it reported a 4.4% decline. Tech Mahindra did not offer guidance, but JM Financial expects it to grow 1.1% in constant currency terms, which is much better than last year’s outing.

A third brokerage also lowered growth expectations for the country’s top five.

“We have lowered our FY26E cc revenue growth for Top 6 from 4.4-7.8% earlier to 2.7-5.8% now,” said JM Financial analysts Abhishek Kumar and Nandan Arekal, in a 31 March note. “A weak 4Q was in the guide. Elevated uncertainty – both regulatory and economic – means actual performance could turn out to be weaker,” said the JM analysts, who include LTIMindtree in their count besides the Big Five.

Wait-and-watch

A fourth brokerage added that clients are in a wait-and-watch mode.

“The discretionary spending recovery that we saw picking up in 1HFY25 has been stuck in the second gear; and clients are likely to be in wait-and-watch mode as they take stock of the trade war, a slower Fed rate cut cycle, and other macro-economic risks,” a Motilal Oswal report said on 1 April. “The net result of this will be a stop-start recovery in discretionary spending, pegging FY26E revenue growth for most large-caps in the range of 2-5% in constant currency (CC),” the note said.

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Uncertain macroeconomic conditions buoyed by geopolitical tensions and high lending rates resulted in a lacklustre outing for the country’s top five in FY24. A phase of renewed uncertainty might put a spanner in the works for the country’s $284 billion IT industry that had finally started to see green shoots towards the end of 2024.

Slower growth may lead IT services companies to deploy fewer people on projects, which might lead to subdued hiring and layoffs.

TCS, Infosys, Wipro and Tech Mahindra increased headcount in April-December 2024, adding a cumulative 17,188 employees. HCLTech was the only IT services company to cull headcount by 6,726 in the first nine months of the fiscal. This addition comes on the backdrop of the top five IT services companies trimming headcount last fiscal by 57,735 in total.

IT investors have also been on the edge since the start of the year. Each of the Big Five have underperformed the BSE Sensex index. Shares of TCS, Infosys, HCLTech, Wipro and Tech Mahindra have fallen 13.41%, 18.75%, 20.27%, 12.73%, and 18.12% between 1 January and 1 April, respectively. The BSE 30 index has fallen 2.86% during this time.

Silver lining

Still, there might be a silver lining. Gen AI, which is expected to grab IT’s lunch, might end up creating growth opportunities.

Also read | Companies expected to increase Gen AI investments by half this year

“IT spending is expected to remain soft, though not to the extent experienced in early CY23, as early experimentations in AI are progressing well to broader implementations. Additionally, with incremental AI components getting infused into larger strategic deals, the risk of trimming ACVs (annual contract value) also gets minimized with the cannibalization of spending from discretionary to cost-focused AI,” said the Prabhudas Lilladher analysts.

TCS, Infosys, and HCLTech grew 3.4%, 1.4%, and 5% to end FY24 with revenues of $29.1 billion, $18.6 billion, $13.3 billion, respectively. On the other hand, Wipro and Tech Mahindra ended FY24 with $10.8 billion and $6.3 billion in revenue, down 4.4% and 4.7%, respectively on a constant currency basis. Constant currency does not take currency fluctuations into account.