IT margins may remain edgy on seasonal lows, deal ramp-downs

Margins for Indian IT companies in the new fiscal year are likely to come under pressure due to wage hikes, investment costs and heightened uncertainties about the demand environment amid the tariff war, according to analysts.

The IT sector is expected to post weak results as it begins announcing fourth-quarter earnings starting this week, even as the global economic uncertainties that have been weighing on the industry performance for some time now are expected to worsen amid the reciprocal tariffs announced by the US.

“We expect EBIT (earnings before interest and tax) margin to remain largely flattish q-o-q (quarter-on-quarter) for most of our coverage, while some firms may see a compression on account of deal ramp downs and wage hikes,” Kumar Rakesh, IT analyst at brokerage firm BNP Paribas, wrote in an earnings preview report.

“We see companies building some caution in their FY26 guidance,” he said.

A steep decline is, however, likely to be arrested by the rupee’s depreciation and cost rationalisation initiatives, most analysts said.

Market leader Tata Consultancy Services will kickstart the earnings season on Thursday (April 10). Wipro will report results on April 16 and Infosys a day later.

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For the fiscal 2026 that started in April, most analysts unanimously predict heightened caution on the margin movement with an estimated slowdown in the pace of revenue growth.

EBIT, or operating, margins are a key metric for IT services firms, reflecting the efficiency of turning revenue into profit after covering all operating expenses.

Inflationary pressures due to the reciprocal tariffs announced by the US last week will further pause IT budgeting and bring back caution on technology adoption by American corporations, which contribute over 50% to the Indian outsourcing industry’s $280 billion revenue.

The revenue growth of the IT services sector is already projected to have slowed to as much as 1.3% sequentially in the March quarter.

Kotak Institutional Equities expects divergent EBIT margin performance due to timings of wage increases and seasonal weakness in certain business segments. “On y-o-y (year-on-year) comparison, EBIT margin will increase for all large companies, except for TCS (in the fourth quarter),” it said.

Among large companies, a Nomura report said it expects both Infosys and HCLTech to have a 150 basis points (bps) (1.5 percentage point) q-o-q margin decline due to salary hikes and seasonal factors including visa cost for Infosys and software business seasonality for HCLTech. “For TCS, we expect flattish q-o-q margins,” it said.

For top Indian IT firms, barring TCS, margins had hit the lowest in three years in the quarter ended March 31 last year (2024). The margins recovered a tad in the first two quarters of FY25.

“IT players are running out of levers for margin expansion given already low attrition and high utilisation. Pricing strain does exist in new deals, which may cap meaningful margin expansion in FY26 our view,” as per a report by brokerage firm Elara Capital.

A JM Financial report predicts the top six players to report margins that are between 120 bps lower and 10 bps higher compared with a quarter earlier. “Barring USD-INR depreciation (tailwind) and lower working days (headwind), each player is battling its own set of puts and takes,” the brokerage said.

TCS’ benefit from BSNL deal ramp-down is offset by reinvestment into talent and infrastructure, it said. Infosys has to deal with wage hikes, visa cost and higher marketing expenses, which will be partially offset by lower cost of third-party items.

“HCLT’s margin will be weighed down by lower software sales and partial wage hike. LTIMindtree’s change of guard, apart from weakness in Hi-Tech (higher margin segment) could delay recovery,” the JM Financial report added.

However, analysts expect steady to strong margin performance for mid-tier companies, deriving benefits from the rupee’s depreciation and strong business growth. Most reports point out strong growing companies like Persistent Systems and Coforge to post healthy margins.

However, L&T Technology Services’ margin will likely dip by 170 bps from the previous quarter due to an acquisition cost, according to analysts.

Overall, mid-cap software services firms are expected to continue the uptick in deal wins, driving faster revenue growth than their larger rivals.