Worrying: Indian IT sector reports 1st revenue decline since 2020
What's the story
Indian technology firms had a tough March quarter, with many of the top ones involved in IT services reporting a fall in revenue.
According to Kotak Institutional Equities, this is the first sequential revenue decline in constant currency terms for all large IT services companies since the June 2020 quarter.
To note, the decline was especially severe in manufacturing and retail verticals, while the revenues of the financial services sector remained stable.
Capacity building
Slow growth and rising headcounts
The brokerage firm also observed a slowdown in revenue growth on a year-on-year basis across firms, with growth dropping to low single digits.
Despite this, headcounts increased across companies suggesting capacity building for future growth.
However, demand deteriorated toward the latter half of the quarter.
All big IT companies barring TCS reported a year-on-year increase in EBIT margin, and stable margins on a quarter-on-quarter basis.
Performance
Mid-tier companies outperform larger ones
Despite the challenges posed to large firms, mid-tier companies like Persistent and Mphasis reported a strong performance in the March quarter.
Kotak Institutional Equities expects these mid-tier companies to outperform their larger counterparts on growth due to a favorable revenue mix and lesser concerns over deflationary risks from new technologies.
Retail, consumer, logistics, travel, and manufacturing sectors are most affected by tariff imposition by the US government.
Outlook
Mixed spending outlook and future challenges
The spending outlook remains mixed across telecommunications, hi-tech, and healthcare sectors amid higher macro uncertainties.
Kotak expects companies with higher exposure to manufacturing and retail sectors in the US market to face stronger headwinds as demand slows down.
The brokerage firm also warned that tech firms are entering a tough phase where margin expansion will be difficult.
Forecast
Q1 FY26 outlook mixed for IT services companies
Looking ahead, Kotak expects a weak Q1 FY26 for IT services companies unless there's a ramp-up in cost take-out deals.
The outlook for the June quarter is mixed, with Wipro indicating an impact on sequential revenue growth due to higher macro uncertainties.
However, Capgemini and Cognizant's outlook suggests no significant deterioration in expected growth in Q1 compared to start-of-year expectations.