FY26 may be worse than FY25 for IT services firms amid global headwinds

Uncertainty is also accentuated as the tariff scenario can play out in numerous different ways. A large part of the tariffs could get rescinded in the future or there can be an escalation of tariffs

The rise in tariffs by the United States government could add to the challenges of the IT services industry, according to a report released on Monday.

 

The report highlights that these tariffs could lead to higher inflation and slower economic growth globally with an increased risk of recession in the US and other developed economies.

 

“Uncertainty at the beginning of the (financial) year would lead to deferred decisions and impact growth in the June quarter. This means that FY26E could now end up being worse than FY25 for many of the companies,” said a report by Kotak Institutional Equities.

 

The report has reduced FY2025-27E revenue growth by 1.2–3.4 per cent and EBIT margins by 10-50 basis points, leading to earnings per share cut of 1.6-5.8 per cent.

 

The uncertainty is also accentuated as the tariff scenario can play out in different ways.

 

“The range of outcomes possible increases uncertainty. We lower target PE multiple by 1-2x to account for these increased uncertainties. Overall, we cut fair values for stocks by 2-10 per cent,” said the report.

 

Because of the new headwinds in the global macro, ‘guidance’ by firms like Infosys and HCLTech will be under scrutiny.

 

The report suggests that: “Companies might prefer a conservative stance given higher uncertainty in the near term and the lack of mega deal-driven revenues in FY26. It may be prudent for companies to defer guidance until there is more certainty on the demand environment or restrict guidance to the next quarter, where there is a higher degree of visibility.”

 

The uncertainty could make companies push the envelope on generative AI usage cases. “A weaker demand environment will only perpetuate the trend. We expect the adoption of more promising use cases (such as code generation, knowledge summarization, querying of unstructured data and customer support), and lower spending on discretionary spending (experimenting with novel use cases),” said the report.

 

While software exporters are not directly impacted by US tariffs, investors are worried that a recession in the US could make a dent in their revenues. The Nifty IT index fell 2.51 per cent, extending its three-day drop to 10 per cent. The worst-performing stocks from the Nifty IT index were Mphasis (down 5.4 per cent), while Infosys, Coforge and HCL Tech each fell over 3 per cent. 

    (Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd)