Trump tariffs: IT stocks eye upto 38% downside if US economy sees recession

Trump Tariffs: Analysts at Kotak Institutional Equities believe Tata Consultancy Services (TCS), followed by Infosys, HCL Tech, and Coforge have lower downside from current levels

IT stocks, US recession amid Trump tariffs: Ever since US President Donald Trump unveiled his aggressive "reciprocal tariffs" on more than 180 countries world over, concerns over the US tipping into a recession amid higher inflation and slower economic growth have resurfaced. On the bourses, investors have scurried to dump information technology (IT) stocks as a recession in the US, a key market for the Indian IT, dims prospects of their earnings growth.

 

Now, forecasting a grim outlook, analysts at Kotak Institutional Equities have said that IT stocks could see up to 38 per cent downside in their stock prices from current levels during a tariff-induced recession. For the stocks under the brokerage's coverage, it anticipates a downside of 18 per cent to 35 per cent in their bear-case scenario.

 

 

"We believe that revenue growth recovery after a recession will be moderate this time, compared to the previous couple of recessions. During the 2009 recession, despite enterprises becoming more cost conscious, Indian IT services companies grew significantly faster than global IT services spend aided by new outsourcing opportunities, captive carveouts, and share gains from legacy vendors," Kotak analysts said. 

 

Recovery during the 2020 recession, meanwhile, was driven by the rush to migrate to cloud and digitalise operations. However, in the current scenario, it is difficult to ascertain the large untapped opportunity that can open post a recession now. Given the sufficient maturity of the outsourcing market, we do not expect large new opportunities, the brokerage warned.

 

Among stocks, Kotak Institutional Equities believe Tata Consultancy Services (TCS), followed by Infosys, HCL Tech, and Coforge have lower downside from current levels. CLICK HERE FOR COMPLETE ANALYSIS

 

Do note, the brokerage's current estimates (base-case scenario) has already seen two cuts in earnings estimates, multiples, and target prices for IT services stocks under coverage due to increasing risks to global economic growth and heightened uncertainty, driven by imposition of tariffs and other aggressive policies by the Trump administration.

 

Its current estimates and assigned multiples assume a slowdown in global economic growth but not a recession. In the base case scenario, Kotak assumes FY2026 revenue growth in the vicinity of FY25 levels, followed by a recovery in FY27E.

 

US Recession: 2009, 2020 vs 2025

During 2009, the IT services industry was hit hard due to heavy impact on financial services (the largest vertical for Indian IT), and enterprises focusing on cost efficiencies in tech spending. This led to a quick shift from boom to bust.

 

During the Covid-19-led 2020 crisis, IT became the savior, enabling businesses to continue serving customers despite lockdowns through online channels. Discretionary spending shot up to enable quick migration to the cloud and increase digitisation. The recession in the IT sector was short-lived in 2020.

 

A recession in the current scenario, however, will be different from the previous two as 1) retail and manufacturing sectors will be impacted more compared to financial services and travel in the past, (2) US government is the driver of the current recession, (3) the velocity of change and uncertainty are a lot higher, (4) the weakening of the US Dollar will limit the extent of rupee depreciation, and (5) monetary policy support could be limited due to the risk of heightened inflation in a high-tariff regime. 

 

IT Sector: Impact on earnings

Given this, Kotak analysts anticipate a 3.7-4.5 per cent revenue growth in FY27E for TCS, Infosys and HCL Tech, which is lower than normalised growth rates. Revenue growth, they said, will be driven by cost take-out deals, incremental increase in discretionary spending, partially offset by revenue deflation from AI adoption, and the residual impact of cost control measures implemented during the recession.

 

"We believe margins will contract in a recession in the current scenario due to pricing pressure with limited extent of rupee depreciation and a lack of availability of easy margin levers. We expect 90-140 bps cut in Ebit margins in FY26-27E, compared to our base-case scenario, for largecap IT stocks (steeper for Tech M)," they said.

 

Will IT stocks correct further?

Kotak's analysis suggests that those IT stocks which can grow at a faster pace will bottom out at a higher multiple as they can gain share from incumbents both in new spends and in renewals and vendor consolidation events at a higher pace.

 

"Overall, our analysis implies a 19-24 per cent downside from current levels over the next 12 months across large IT companies and a 21-35 per cent downside for mid-tier IT. According to our analysis, the highest downside relative to current market price is for Persistent and Mphasis. The downside is significant but relatively lower for TCS and Infosys, followed by HCL Tech and Coforge," it said.

 

The brokerage estimates PE multiples to bottom out in the 15-18X range for Tier 1 IT and higher for select mid-tier. These drive a 22-38 per cent downside in target prices compared to base-case target prices (current estimates) and an 18-35 per cent downside in target prices compared to current levels.