IT stocks may face up to 38% downside amid Trump tariff shock, says Kotak Institutional Equities

Indian IT stocks are back under pressure as fears of a US-led recession are gaining traction following President Donald Trump's announcement of sweeping "reciprocal tariffs" on over 180 countries. The United States remains the most critical market for Indian IT services, and any slowdown in that economy is expected to significantly dampen sector growth.

Analysts at Kotak Institutional Equities have now sounded a fresh warning, projecting a potential downside of up to 38 percent in Indian IT stocks if the global economy tips into a tariff-induced recession.

The Nifty IT index saw a modest recovery in today's session, gaining 1.7 percent. However, the bounce comes after a sharp three-day losing streak, during which the index fell by over 10 percent.

Despite the day’s gains, the broader trend remains negative. Over the past year, the index has declined by more than 7 percent. The weakness has extended into the current financial year as well, with April alone witnessing a 10 percent drop so far. This marks the fourth consecutive month of losses for the sectoral index, following a 1 percent decline in March, a steep 12.5 percent fall in February, and a 1.5 percent dip in January.

Bear-Case Forecasts Suggest Deep Correction Ahead

In its latest report, Kotak Institutional Equities estimated that IT stocks under its coverage could correct by 19–38 percent from current levels in a worst-case scenario. The brokerage said the overall downside for the sector could be as high as 38 percent in a recessionary environment triggered by the new US tariffs.

According to the report, the Indian IT industry is unlikely to witness the same strong recovery it enjoyed in previous downturns, such as the 2009 and 2020 recessions. "Unlike in 2009, when outsourcing and legacy vendor replacement drove growth, or in 2020, when enterprises rushed to digitize and migrate to cloud, there is limited visibility of any similar untapped opportunity emerging post a recession this time," the note said.

Muted Growth and Margin Pressures Ahead

The brokerage expects a slow and uneven recovery in revenue post-recession. In its base-case scenario, which assumes no recession but a slowdown in growth, Kotak forecasts revenue growth of just 3.7 to 4.5 percent in FY27E for top-tier companies like Tata Consultancy Services (TCS), Infosys, and HCL Tech. Growth is expected to be led by cost optimization deals and minor recovery in discretionary spending, though this will likely be offset by pricing pressure from AI-led automation and persistent cost controls.

Margins, too, are expected to come under pressure. Kotak projects a contraction of 90 to 140 basis points in EBIT margins during FY26–27 for large-cap IT firms, as pricing remains weak, rupee depreciation support fades, and traditional margin levers dry up. Tech Mahindra is expected to see a steeper margin fall compared to peers.

TCS, Infosys, HCL Tech, Coforge Seen as Relatively Safer Bets

Among large IT names, Kotak views TCS as having the least downside risk, followed by Infosys, HCL Tech, and Coforge. In contrast, mid-tier IT companies like Persistent Systems and Mphasis are seen as the most vulnerable to corrections, both in terms of earnings and valuation.

While the firm believes companies that can capture market share through vendor consolidation or large renewals may bottom out at better valuations, the overall expectation is still a steep 19–24 percent downside for large-caps and 21–35 percent for mid-tier IT firms over the next 12 months.

Kotak also revised its price-to-earnings (PE) multiple assumptions, expecting them to bottom in the range of 15–18x for Tier-1 companies and slightly higher for some mid-tier names. This translates to a 22–38 percent cut in base-case target prices and 18–35 percent fall from current stock levels.

In summary, the Trump administration’s aggressive tariff policy has introduced a fresh layer of uncertainty for India’s IT sector, already grappling with a global growth slowdown. While industry bellwethers like TCS and Infosys may fare relatively better, Kotak Institutional Equities believes the broader IT space could face meaningful valuation corrections if recessionary conditions take hold. Investors are advised to tread with caution, as pricing pressure, margin squeeze, and limited post-recession tailwinds may weigh on the sector's near-term prospects.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.