Moneycontrol Pro Panorama | Risks that loom over India’s IT sector

Indian IT companies have turned cautious on the road ahead.

Dear Reader,

Indian information technology (IT) stocks, usually known to hold out during market downturns, have been witnessing sharp selling over the past few months. Even as equity benchmarks and broader markets are gyrating with a mix of good and bad days, the IT heavyweights are unidirectionally moving south, reflecting gloomy prospects for the sector, in particular.

What gives? To be sure, Indian IT heavyweights are among the most well-managed firms with a claim to fame of realigning strategies to become future-fit in a dynamic economic milieu. Whether it was the infamous Y2K, dotcom cycle bust or even the tightening of immigration laws during former US President Joe Biden’s era, companies such as Infosys, TCS, Cognizant, Wipro, and HCL to name a few, have stood tall over decades, showcasing stability in revenue and earnings growth.

But this time around, the risks to business prospects seem to be emanating from several quarters and look more threatening than ever before. It is the uncertainty from a possible US recession and global slowdown that is forcing IT companies to back down revenue growth for the near term. The World Trade Organisation, in its Global Trade Outlook, highlights what Trump’s trade war could cost the world. With a huge drag in economic growth led by North America, global merchandise trade will shrink by 0.2 percent in 2025 and services trade growth may slow to 4 percent in 2025, states the report. Read here for more.

US Federal Reserve chairman Jerome Powell’s statement warning of inflation, slowdown and a challenging scenario came as a dampener, signalling delays in rate cuts in the US.

It is not surprising, therefore, that Indian IT companies have turned cautious on the road ahead. Both TCS and Wipro failed to impress investors with the March quarter results. In fact, Wipro’s FY2025 performance marks the second consecutive year of revenue decline. In this analysis, MCPro Research Madhuchanda Dey points out that IT service players are facing decision-making delays, a pause in discretionary spending, and project ramp-downs. All eyes are on Infosys' results to be announced today!

The bigger problem is that even before Trump’s trade war, the IT sector was already realigning its playbook to adapt to the world of artificial intelligence (AI). Again, it has been hard to tell what the impact of AI would be on long-term revenue and profit progression of the IT sector. Management commentaries have been mixed in that while AI could threaten IT sector job, on a positive note it could  push industries to use new tools to improve efficiencies, which in turn could translate into more work orders for IT firms.

However, a recent media report cited an interesting report by Greyhound Pulse 2025 – CIO Compensation Outlook. It stated that 61 percent of enterprise tech leaders globally are reassigning the budget from traditional IT delivery to AI-infused automation and business outcomes. This shift is forcing tier-1 Indian IT vendors to reassess not only hiring volumes, but also compensation strategies. Furthermore, 74 percent of CIOs globally said they expect at least 25 percent savings from AI adoption in application maintenance and infrastructure support by Q4 FY2025.

In short, the near-term prospects for the IT sector are fraught with uncertainty. Given that manpower or intellectual capital is to the IT sector what capital expenditure in machinery is to manufacturing, deferred recruitment and wage hikes are likely to be the order of the day for IT firms. That said, note that the sector has proved to be nimble-footed in bouncing back from adversities. Steep fall in stock prices of IT firms could also open a window of investment opportunity for patient participants in the market. After all, there is no method in the madness of trade war and tariffs!

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