Derating Risk Looming Large Over IT Firms

If you see, Nifty IT index has been one of the laggards, pulling down the overall index since the beginning of the year. Given the uncertainty around growth, CY25 may not be very different from last year in terms of growth. With Trump tariffs, recovery is back-ended for now, said a Mumbai-based analyst

Bengaluru: Indian IT services firms in both large and mid-tier space are increasingly facing derating risks in Indian market owing to consistent negative returns for last few years. According to sources in the know, continuing underperformance of IT companies in Indian equity market has raised such possibilities.

Notably, Nifty IT index has underperformed in 2023 and 2024 with most stocks giving lesser return than the market gauge. Most market experts were hopeful that 2025 would be a better year with IT index driving the index.

“If you see, Nifty IT index has been one of the laggards, pulling down the overall index since the beginning of the year. Given the uncertainty around growth, CY25 may not be very different from last year in terms of growth. With Trump tariffs, recovery is back-ended for now,” said a Mumbai-based analyst.

Since January this year, returns Nifty IT has been negative. Nifty IT index has fallen by 22.67 per cent year to date. Last week alone, the index dipped close to 10 per cent as risks to business growth increase after Trump administration-imposed tariffs with all their trading partners. In comparison, Nifty lost around 3 per cent year to date.

In this context, many market experts are anticipating a negative rating of Indian IT companies in the coming quarters. Some brokerage firms have already downgraded the target price for many IT stocks though de-rating has not happened yet.

For instance, JP Morgan has downgraded HCLTech to ‘neutral’ from ‘overweight,’ citing a weak fourth-quarter performance, sluggish deal wins, and macroeconomic challenges. It has also lowered target price for many IT stocks including TCS, Infosys, and Tata Elxsi.

The brokerage maintains a cautious approach, saying that FY26 is unlikely to bring significant growth acceleration.

“If the underperformance continues for more quarters, the sector is likely to see negative rating by brokerage firms. This will, in turn, see more selling pressure from FIIs,” said the Mumbai-based market expert.

Meanwhile, Trump tariff has emerged as a significant risk for the IT services sector globally. According to industry experts, manufacturing, automotive, aerospace, hi-tech and retail segments of the IT industry are likely to see the adverse impact of these tariffs.

Sources in the know said that technology spend by enterprises in the US and Europe is likely to be adversely affected due to such imposition of tariff. As Indian IT firms are all set to announce their Q4 performance from this week onwards, management commentary on growth prospects will be keenly watched.