India's IT services sector is expected to see a slowdown in discretionary spending over the next few quarters due to global uncertainty and shifting demand conditions.
Accenture’s Q2 FY25 earnings report has raised concerns about India’s IT sector, causing a decline in shares of major tech giants like Tata Consultancy Services (TCS), Infosys, and HCL Technologies.
While Accenture's results were a recent trigger, challenges in India’s IT sector have been building for months, as reflected in the Nifty IT index, which has fallen over 25 per cent from its record high in December 2024.
On a year-to-date (YTD) basis, the Nifty IT index has declined over 15 per cent, significantly underperforming the benchmark indices—Sensex and Nifty 50—which have fallen just 2.05 per cent and 1.65 per cent, respectively.
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What Accenture’s Q2 FY25 Results Reveal About India’s IT Sector
Last week, Accenture's management highlighted rising global economic and geopolitical uncertainty, particularly impacting public services due to government spending cuts.
The US-based IT giant’s management last week highlighted that despite some improvement in discretionary spending, particularly in banking and capital markets in the US—the overall environment remains unchanged, with clients prioritizing large-scale transformation projects.
Brokerage firm Nuvama said, Accenture’s management emphasised elevated uncertainty in the global economic and geopolitical environment. While the company believes it can mitigate the impact on FY25 growth, the outlook remains uncertain. Additionally, Accenture derives eight per cent of its revenue from federal agencies, which face significant risk due to mandated cuts in consulting spending.
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What Is Ailing India’s IT Sector
According to Shibani Kurian, senior EVP & head of equity research at Kotak Mutual Fund, technology stocks have been under pressure recently due to uncertainties over the global growth outlook, tariffs, and geopolitical tensions.
She said, "The key concerns include the potential slowdown in US GDP growth and its impact on discretionary tech spending, as well as the effect of tariffs on cross-border trade and US inflation. While navigating near-term volatility is necessary, the structural growth opportunity in IT services remains strong, especially as more companies worldwide enter the AI adoption phase, which we believe presents a multi-year growth opportunity for Indian IT services."
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However, Kurian noted that after the recent correction, sector valuations have become more reasonable. She added that valuations for many large-cap IT players are now close to their long-term averages.
