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Indian IT was the easy trade for two decades. Outsourcing, dollar revenues, predictable margins. The setup just changed in ways that take time to fully appreciate.
What client tech budgets actually look like
US and European corporates have been compressing tech budgets since 2023. Some of it is normalization after the COVID-era splurge. Some of it is tougher economic conditions. Some of it is uncertainty about which AI investments matter.
For Indian IT services companies, this means deal sizes are smaller, decision cycles are longer, and discretionary spend is harder to predict. The big multi-year deals that powered growth in the 2010s are less common.
Quarterly results from TCS, Infosys, HCL, and Wipro have shown this pattern consistently. Revenue growth in single digits. Constant currency revenue declines in some segments. Margins protected through cost actions, but underlying demand remains soft.
The H-1B headache, plain and simple
Visa rules in the US have tightened. The proportion of work that has to be done onshore has increased. Indian IT companies have shifted to hiring more Americans for US-facing roles, which costs more.
The structural advantage of Indian IT was wage arbitrage. Highly skilled engineers in India for a fraction of US engineering costs. As more work shifts onshore, that arbitrage shrinks.
This is a multi-year drag, not a single-quarter event. Companies adapt by raising prices, reducing margins, or doing both. Investors expecting prior margin profiles are likely to be disappointed.
Why margins are stickier than feared
Despite the headwinds, Indian IT companies have managed margins better than expected. Three reasons.
Pyramid management. Hiring junior staff at lower cost while pushing experienced staff into higher-value roles.
Automation in delivery. Some of the rote work that used to be done by mid-level engineers is now automated, reducing the need for headcount growth proportional to revenue growth.
Pricing discipline. The largest IT services companies have refused unprofitable deals more aggressively, focusing on margin over growth.
These dynamics buy time. They don’t replace the lost growth engine. But they prevent the margin collapse that some bears expected.
Mid-cap IT: a different story
Mid-cap IT names like Persistent, Coforge, Mphasis, and LTIMindtree have shown different patterns. Some have outperformed the large-caps, partly because they’re more focused on specific verticals where demand has held up.
Pure-play digital and product engineering companies have more direct exposure to AI-driven demand. They’ve been winners while traditional services lag.
The dispersion within Indian IT has increased dramatically. Picking the right name matters far more than 5 years ago, when the entire sector moved together.
Position sizing in a structural slowdown
If your portfolio has heavy IT exposure built up from past performance, the natural reaction is to ride it out. The math says think harder.
Reduce overgrown positions to a more reasonable weight. 8 to 10% IT exposure is plenty for diversification purposes.
Within IT, lean toward digital-focused mid-caps over traditional large-cap services. The growth profiles are different.
Don’t add IT just because the stocks have corrected. The valuations after correction still bake in expectations of recovery. Buying corrections requires conviction that the recovery is imminent. The data doesn’t strongly support that view yet.
Where IT could surprise positively.
Three things would change the story.
A genuine AI deployment cycle that drives traditional services demand. Some signs of this are emerging but unclear.
Currency tailwind from sustained rupee weakness. INR at 95 helps revenues in rupee terms.
A US economic resurgence that frees up corporate tech budgets. Possible but not the base case.
If two of these three play out, IT names could revisit prior multiples. If none do, the names trade more like utilities than growth.
For most HENRYs, IT belongs in the portfolio at lower allocations than 5 years ago. Not zero. Not overweight. Right-sized for a sector with structural challenges and surviving fundamentals.
