“Demand uncertainties from the second half of calendar year 2024 (2HCY24) have trickled into calendar year 2025 estimated (CY2025E) budgets, implying continued weakness in financial year 2026 estimated (FY2026E),” Kotak Institutional Equities said in a report on the IT sector.
The IT services industry clocked the healthiest earnings rebound in six quarters in the October-to-December period backed by a modest uplift in business led by the key banking, financial services and insurance (BFSI) vertical. This had raised hopes of a likely boost in revenue growth from the low to high single digits in 2025 at top-tier firms such as Tata Consultancy Services (TCS), Infosys and HCLTech.
ETtechFinancials of top majors in the preceding quarter
However, the past few months have witnessed a return of the cautionary stance on client budgets in the US and other major regions, with the prevailing uncertainty likely to renew a pause in discretionary spending on technology.
Experts have said this could inflate cost pressures, further delaying growth prospects for the $280-billion Indian outsourcing industry. Most firms, including top- and mid-tier ones, which scored robust deal wins previously, could see further protracted execution of the contracts.
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“The Trump administration is aggressively examining spending by US corporations on foreign products and services, but this is largely restricted to the EU, UK, Canada, China and Mexico at present. However, there is some expectation from industry leaders that exports of IT work to India will come under the spotlight as the tariff programmes get rolled out,” said Phil Fersht, founder and chief analyst at advisory firm HFS Group.
Fersht believes the impact could ultimately result in about 20% cost increases for IT firms. Yet, stakeholders suggest they will wait and watch till April 2 — when Trump has pledged to impose reciprocal tariffs on many countries including India.
This week, further heightening the concerns, the US Federal Reserve decided to pause interest rates citing sentiments sliding due to policy turmoil, and that inflation could rise faster than previously expected. On the positive side, Fed policymakers still expect the central bank to deliver two 0.25% rate cuts by this year-end as projected in December.
A better FY26
Because of these factors, most companies and experts remain hopeful of a better FY26 than FY25, with an expected rebound from the second half of the coming fiscal year.
“Some of the latest commentary by US retail companies raised concerns of a demand slowdown among US consumers. However, we see this as a sign of caution and not weakness, at least not yet,” wrote Kumar Rakesh, Indian IT analyst at BNP Paribas, in a March 6 report. He added that for 2025, major retail enterprises are targeting capital investments that match or surpass those of 2024.
“While some of these firms highlighted weak demand in Feb-25, they have also seen strong retail sales during the Valentine weekend in the US. CEOs sentiment among US enterprises, especially for capex, continues to improve, giving comfort to our expectation of a demand recovery,” according to the report.
Data from the BNP Paribas report showed deal wins in February moderated from the January highs but remained strong with TCS, Cognizant and DXC Technologies leading with three wins each followed by two announcements from HCLTech.
Sectorally, it was on track with BFSI leading the deal momentum followed by energy and utilities contracts dominated by Europe with 11 deals. However, North America unexpectedly slowed with just two deal win announcements and the rest of the world bagging three deals. To be clear, the report does not show exhaustive deal wins.
Moreover, most deal wins announced were related to IT and digital transformation, and business operation modernisation.
Competitive landscape
Analysts expect cost pressures on enterprises to increase competitive intensity in the software services industry as the latter faces a battle between margin protection and client retention.
“The competition would be fierce given a modest increase in spending and a focus on spend efficiency by clients. These factors could impact pricing in new contracts,” the Kotak report highlighted. Further, select ESPs (external services providers) with strong capabilities in embedded engineering and offshore presence would benefit from large deal wins, it added.
The intense competition is not just from smaller and mid-tier outsourcers but also insourcers or global capability centres (GCCs) of foreign companies, which could also be clients. To partly offset loss of business share to GCCs, India’s large and mid-sized IT services firms are also setting up dedicated units and practices with leadership and teams to help multinationals establish such centres.
The AI impact
There is a strong focus on small-and short-term deals though the emphasis remains on cost-efficiency and AI-led deals. On Thursday, IT services giant Accenture raised the lower end of its annual revenue forecast to 5-7% from 4-7% earlier, which is typically indicative of the likely performance by homegrown IT companies. TCS will kick start the Indian IT sector’s earnings season on April 10.
“There were some pockets of improvement, for example, in banking and capital markets in the Americas, but again, going into the calendar year, discretionary spending was overall about the same constraint, and particularly in small deals that we’ve been seeing,” said Julie Sweet, CEO, Accenture.
Accenture posted 5% revenue growth at $16.7 billion in FY24, but new bookings fell 3% while Gen AI new bookings edged up marginally to $1.4 billion from previous quarter’s $1.2 billion. “In H1, we did $1.1 billion in revenue, and last year, in FY24, we did $900 million for the entire year,” Sweet said in a post-earnings commentary. Accenture follows the September to August financial year.
Most analysts agree that AI has transitioned from a buzzword to a core growth driver for the IT services industry. According to Fersht, the macro changes will further drive focus on AI-first services where increasing amounts of service provision are programmed into software platforms using agentic technology, generative AI and other AI technologies.
The intense business environment is also witnessing an overhaul with reshaping of managements where at least eight new CEO changes at LTIMindtree, Cyient and Happiest Minds Technologies and at least three companies including Wipro tweaking their organisational structures since January this year.
“For these firms, AI is both a tool to improve their own operations and a major service line, which can add value to their offerings. IT companies that successfully weave AI into their offerings are likely to see higher productivity, faster growth besides gaining access to larger transformation deals as clients accelerate investment in AI,” brokerage Centrum said in a report.
Failing to embrace AI could render traditional outsourcing services less competitive, as automated solutions undercut labour-intensive work, it added.
Hiring slowdown
For the first time, the December quarter also saw a visible shift in commentary from labour to technology, signalling a slowdown in headcount expansion for the people-led outsourcing industry. While most IT companies announced increased commitment to hiring more than 82,000 freshers in FY26, overall employee addition is likely to remain subdued as companies remain on the edge for further recruitment.
Looking ahead to FY26, the hiring outlook for the Indian IT services sectors remains subdued in the near term.
“At the start of FY26, hiring in the IT sector is expected to remain cautious, with a focus primarily on niche skills essential for AI adoption and innovation,” said Aditya Narayan Mishra, MD and CEO at mass recruitment firm CIEL HR. “Attrition rates, which reached a peak of 35% during the IT services boom, dropped to 18-20% in FY23 and further to 16-18% in FY24.”
The drop in attrition is expected to persist due to economic slowdowns and a weak demand environment, he added. The Indian IT hiring landscape is transitioning towards a focus on efficiency, innovation and strategic workforce planning. With AI-driven automation reshaping business models, companies must prioritise digital transformation, employee upskilling, and advanced hiring strategies.
“The growth momentum is expected to pick up in the second half of the fiscal year. We anticipate an 8-10% increase in hiring for IT services in FY26 with a primary focus on specialised skills like AI and data science,” said Kapil Joshi, CEO, Quess IT Staffing.
