IT Firms Grapple with Margin Pressures and Weak Demand in Uncertain Times

As of August 25th, 2025, investors in IT companies continue to grapple with weak demand and margin pressures. The ongoing global macroeconomic instability due to tariffs has deterred discretionary IT spending, causing further delays in clients' decision-making cycles.

In the first quarter of fiscal year 2026 (Q1FY26), 60% of the 15 large- and mid-cap IT companies missed margin estimates, a significant increase from the previous quarter's 33%. Some firms noted incremental margin pressure ahead, as companies appear to have exhausted important margin levers. While deal wins were robust in Q1FY26, they were mostly led by cost-takeout projects, which are typically margin-dilutive.

To counter the demand-supply mismatch, IT firms have resorted to measures like deferral of wage hikes and muted hiring/restructuring. Tata Consultancy Services Ltd announced layoffs, HCL Technologies Ltd is adjusting talent deployment outside India, and Wipro Ltd booked a restructuring charge in Q1FY26 related to severance payments in Europe. Headcount growth is expected to be slow as ramp-up for several large cost-take-out deals is likely to start in the second half of FY26.

Despite some companies raising the lower end of their FY26 revenue growth guidance, the overall outlook remains bleak, with concerns emerging whether the expected earnings growth in H2FY26 will actually materialize. The Nifty IT index has declined 18% so far in 2025, and revenue visibility for the remainder of the fiscal year is still uncertain.