The Indian IT services sector may face intensified headwinds in FY26, according to a recent report by Kotak Institutional Equities. The analysis indicates that the recent tariff hikes announced by the U.S. government could exacerbate inflationary pressures and dampen global economic growth, increasing the risk of a recession in the U.S. and other major economies.

Kotak warns that uncertainty at the beginning of the financial year is already impacting business decisions, potentially delaying project approvals and slowing down growth in the June quarter. As a result, FY26 may prove to be more difficult for many IT firms than FY25.

The report has revised its FY27E outlook, cutting revenue growth estimates by 1.2%–3.4% and reducing EBIT margin forecasts by 10–50 basis points. Consequently, earnings per share (EPS) projections have also been lowered by 1.6%–5.8%.

Given the range of outcomes that could stem from the current tariff situation, Kotak has reduced its target price-to-earnings (PE) multiples by 1x–2x, citing elevated uncertainty. Fair value estimates for IT stocks have been trimmed by 2%–10%.

Additionally, the market is closely watching guidance from major players such as Infosys and HCL Technologies. The report notes that firms are likely to adopt a more cautious stance, possibly delaying annual guidance or restricting outlooks to the upcoming quarter, where visibility is higher.

Interestingly, the current macro environment may accelerate the adoption of generative AI in the IT services space. Companies are expected to focus on high-impact use cases like code generation, knowledge summarization, querying unstructured data, and customer support, while scaling back on discretionary and experimental AI investments.

Though Indian IT exporters aren’t directly affected by the U.S. tariffs, investor concerns about a potential U.S. recession are putting pressure on the sector. The Nifty IT Index dropped by 2.51% recently, extending a three-day slide to over 10%. Stocks like Mphasis, Infosys, Coforge, and HCL Tech saw notable declines.

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