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IT stock at 52-week lows on US growth concerns

ICICIdirect Research 13 Mar 2025 DISCLAIMER

Nifty IT index is down ~12% in last one 1 month vs. ~2% decline for Nifty during the same period. 

US Economic Concerns - The US is the biggest market for Indian IT firms, but the macro backdrop is shaky.  Notably, GDP growth is slowing, while inflation remains high (Feb inflation stood at 2.8% still above the 2% target) and hopes of interest rate cuts in 2025 have faded amid tariffs led uncertainty.  While higher-for-longer interest rates remain a headwind, there is also rising uncertainty on growth outlook. This uncertainty is making clients cautious, delaying their spending on IT projects.  

We also note that given that Indian IT player earn ~50% of their revenues from US, where tariff concerns are being talked about. Nonetheless, we believe that IT service exports aren’t directly impacted by tariffs, albeit uncertainty over trade and immigration policies could still hurt the sector.

Slowing Revenue Growth: We also note that hopes of a strong recovery in FY26 are fading, with risk that revenue growth could now be just 4-6% in USD terms, vs. high single digit expectations with lower discretionary spends.  IT companies such as Infosys, LTIM and Wipro, with higher discretionary revenues would face more challenges to growth, in this scenario.

Our view: Most companies in Q3 earnings had hinted at a better FY26 vs FY25, but with these recent developments, uncertainty has crept back in and the risk of earning cuts has increased. With recession risks in the US rising and clients cutting back on non-essential spending, a meaningful recovery in FY26 looks uncertain especially for discretionary spends. Any real bounce-back might only come in FY27—unless macro conditions improve sooner. Key monitorable would be medium term US inflation data and trade developments, which could set the tone for outlook. Furthermore, Q4FY25 earnings commentary would also be a key event amid this uncertainty. Our preferred picks in the space in are Persistent (TP 7300) and Coforge (TP 9200).

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