Is IT Services Sector Set for Extended Period of Underperformance?

A poor single-digit year-on-year growth in dollar revenue has been the main area of concern for the export-driven IT sector in recent years. In the 1990s, several companies were growing their dollar revenues by over 50% annually.

A major reason for the current sluggish performance is the base effect. From less than $10 billion in the 1990s, the sector’s export revenues have risen to more than $282 billion in 2024-25. Arithmetic has its limits in business, and once the base becomes very large, sustaining high growth rates year after year becomes extremely difficult.

This effect, combined with a slowdown in Europe and macroeconomic volatility in the United States, resulted in export growth of only 6% in 2024-25, taking the tally to $282.6 billion.

NASSCOM expects exports to continue growing in the same single-digit range of around 6% in 2025-26. For large technology players, the situation is worse, as they are managing only 2–4% growth annually.

Against this backdrop, the United States has sharply raised the one-time H-1B visa fee to $100,000. Indian companies’ dependence on these visas has declined significantly in the last three years, and workers on such visas now account for less than 1% of the total employee base of the top 10 IT firms. Even so, the fee hike is expected to shave off as much as 1% from EBITDA margins and reduce earnings by up to 5% in 2026-27.

The question is whether the sector can manage this margin headwind and regain momentum in the domestic stock market. The outlook is not encouraging. Global capability centres are expanding at a faster pace, a trend reinforced by the H-1B visa cost barrier, and this will eat into the business of established IT firms.

Meanwhile, the tariff war launched by the United States threatens to dent growth in its own economy. Tariff hikes are being imposed across almost all major trading partners and cover most categories of imports. That will inevitably stoke imported inflation, drag down consumer demand, and slow economic activity in the United States.

For Indian IT exporters, the steady depreciation of the rupee over the last decade has failed to deliver the margin benefits that theory would suggest. Buyers of Indian IT services have grown more sophisticated and appear to be negotiating contracts implicitly in rupee terms, thereby neutralising any currency advantage.

On account of this, the bilateral trade negotiations between Washington and New Delhi becomes highly critical. If these talks fail, a 25% tax on IT service exports to the United States could follow, which would inflict further damage on the sector.

The challenges are not only external. Large domestic IT firms have been slow to diversify into products or IT-enabled services. They have preferred to return surplus cash to shareholders and maintain attractive return ratios. This conservative approach has allowed new-age firms to expand into digital retail, capital market infrastructure, and other IT-enabled segments. These firms have achieved rapid growth and created significant wealth for their shareholders.

At the same time, the larger incumbents avoided aggressive acquisitions of mid-sized Indian IT firms. Foreign private equity funds seized the opportunity, buying several of these firms and generating enormous returns for their own investors.

The reluctance of large Indian IT companies to pursue inorganic growth has become a critical weakness. Except for a handful of deals, they stayed on the sidelines, missing a chance to consolidate the domestic market. The outcome is that international investors have captured much of the value that could have accrued to Indian promoters and shareholders.

The sector now faces no shortage of headwinds in the short to medium term. It must rethink its strategy. Building out GCCs, diversifying into IT-enabled services, and pursuing inorganic growth through acquisitions are no longer optional.

Without bold moves, companies will continue to accumulate cash but see their stock market valuations contract, much like commodity companies that trade at a discount despite strong balance sheets.