IT sector expected to deliver modest Q2 performance amid US regulatory pressure: Report

NEW DELHI: The Indian IT sector is expected to report modest performance in the second quarter of FY26 due to ongoing macroeconomic uncertainty and increased regulatory pressure from the United States, according to a report by Systematix Research.

The report highlighted that IT services companies are likely to post muted growth, constrained by the uncertain global environment and new policy measures impacting the industry. “We expect IT services companies within our coverage to deliver modest 2QFY26 performance, constrained by macro uncertainty and heightened regulatory pressures”, the report stated.

The report further noted that the prolonged uncertainty is expected to cap growth in FY26 and delay any meaningful recovery to FY27. The NIFTY IT index has already declined by nearly 20 per cent year-to-date, primarily due to President Donald Trump’s reciprocal tariffs. However, the report mentioned that Tier-1 IT company valuations are now looking reasonable, even though overall demand visibility remains weak.

The demand environment has largely remained unchanged since the first quarter, with clients continuing to show caution on discretionary spending.

The quarter also witnessed key developments such as TCS layoffs, a steep USD 100,000 hike in H1-B visa fees, and a proposed 25 per cent outsourcing tax by the Trump administration. These measures have heightened concerns about staffing models, operating costs, and overall demand visibility across the sector.

The report expects deal activities during the quarter to be largely centered around cost optimization and takeout initiatives, as global enterprises adopt a wait-and-watch approach toward the potential impact of tariffs on their cost structures and supply chains.

Sequential revenue growth for the second quarter is expected to remain subdued, with Tier-1 IT companies likely to report growth in the range of only 0.6 per cent-1.8 per cent in USD terms. While the banking, financial services, and insurance (BFSI) vertical is expected to continue driving growth, manufacturing and retail segments are likely to face pressure due to tariffs and muted spending budgets.

Although deal wins have been strong, their conversion into revenue may take longer, delaying recovery into the second half of the fiscal year. Margins are expected to remain flat, as currency gains and cost optimization measures offset the costs associated with project ramp-ups.

Despite valuations appearing reasonable, the overall structural demand outlook for the sector remains uncertain. The report concluded by stating that it maintains a cautious, bottom-up stance on the IT sector. (ANI)