Q4 results preview: Macro headwinds cloud IT firms' growth outlook

Accenture said last week discretionary spending has picked up in financial services and in the US

As the curtains draw on the current financial year, Indian information technology (IT) firms remain cautious, with expectations of a soft fourth quarter, driven by lower discretionary spending and ongoing macroeconomic uncertainties.

 

Concerns over recovery in FY26 persist, with rising risks stemming from tariff wars and inflation.

 

Analysts reckon that the final quarter of FY25 (January-March) may see improved client demand, particularly in the financial services sector.

 

However, the recent commentary from Accenture, after its Q2 results, has raised concerns about growth prospects for FY26.

 

Many believe that heightened global macroeconomic uncertainty, particularly the impact of tariffs on the US economy, is still clouding the outlook.

 

Accenture said last week discretionary spending has picked up in financial services and the US. That could bode well for TCS, Infosys, and Wipro among others, where banking, financial services, and insurance (BFSI) business contributed between 25 and 40 per cent to the top line annually.

 

Growth rates in FY25 and FY24 are about 4.3 per cent and 2 percent respectively, according to IT industry body Nasscom.

 

According to a note from Icra, the growth for FY26 is expected to be moderate in the range of 4-6 per cent in US dollar terms.

 

“While we agree that whether the US slips into a recession remains something to watch for, we think this might only cause a temporary air pocket as recessions usually drive further cost takeout programs and help drive up outsourcing demand,” Macquarie analyst Ravi Menon said in a note.

 

Macquarie estimates a growth of 6-9 per cent for the next financial year for largecap companies, if the growth levers pan out properly and macroeconomic conditions do not worsen further.

 

This view is supported by Accenture’s Q2 results, where the company narrowed its guidance range for the full year to 5-7 per cent in constant currency, up from 4-7 per cent a quarter ago.

 

However, the overall performance of India's top IT players has been less robust than the previous years. 

 

Largecap firms have experienced low growth in constant currency terms in Q3FY25, while midcap companies such as Coforge have outpaced their larger peers.

 

The key question, moving forward, is how the economic challenges will unfold in the next six months as clients finalise their IT budgets.

 

Any further deterioration in macroeconomic conditions could negatively affect growth, leading to stalled projects and revised client priorities, which would, in turn, impact hiring plans.

 

IT firms are expected to recruit more from engineering colleges compared to recent years.

 

The Indian IT services sector is a $283 billion sector, employing over five million professionals.

 

“While a strong recovery of discretionary demand may take a few quarters, it is unlikely to worsen significantly unless there is a very sharp deterioration of the macroeconomic situation. While macro risks have increased versus the end of 3QFY25, we believe the absence of exposure to US federal government contracts puts Indian IT companies in a better situation versus Accenture,” Nomura analyst Abhishek Bhandari said.

 

Despite the challenges, analysts do not anticipate full-scale growth until FY27. Sectors outside BFSI and hi-tech, such as retail and manufacturing, face long-term growth challenges due to limited discretionary spending.

 

As a result, firms may focus on cost-cutting projects in the short term, which could lead to lower margins in the next two years.

 

“We believe large companies like TCS and Infosys could see muted Ebita growth at a low to mid-single digit CAGR over the next two years in our bear case scenario,” Morgan Stanley said.

 

Investors will also be watching the scaling up of generative AI (GenAI) deals, which could significantly impact the industry.

 

Indian companies, except for TCS, have yet to disclose specific data on order bookings related to GenAI, which is poised to transform their operations. Accenture recently reported new bookings worth $1.4 billion related to GenAI in its second quarter.

 

The upcoming earnings season for Indian IT services will begin on April 10, with Tata Consultancy Services (TCS) announcing its Q4FY25 results, followed by Wipro on April 16, and Infosys on April 17, where guidance will be closely scrutinised.