Coforge is the latest of the country’s largest software service providers, including HCL Technologies Ltd, Wipro Ltd, Tech Mahindra Ltd, LTIMindtree Ltd, Mphasis Ltd, and Hexaware Technologies Ltd, to address tariff-related uncertainties as a risk to business. This implies that tariff disputes are emerging as the single biggest challenge for India’s largest tech services companies.
When countries impose tariffs on imports from other countries, companies that count IT services companies, including Coforge, as their IT vendor, face the heat. Running their daily business becomes a hassle. The costs of sourcing raw materials increase, and in such instances, they have to pull back their tech spending.
Coforge ended last year with $1.47 billion, up 31.2% on a yearly basis. The company has been growing the fastest among Indian IT’s big 10 since the last 15 months. While the growth is not in question, the management rang alarm bells on tariffs.
“One of the significant risk factors that has emerged in recent weeks is the issue of a potential tariff war between nations. In an unprecedented move, effective beginning April 2025, the Trump administration announced sweeping tariffs on all major countries and regions as the US government sought to balance its trade deficit with trading partners,” read the company’s FY25 annual report filed on 28 August.
Higher taxes on goods and services from the US’s trading partners might impact clients who source materials essential to running their businesses from those countries. IT outsourcers earn most of their revenue from the US.
Tariff shock
“The world’s GDP growth, which global wars had already ravaged, now faces another major challenge in the form of tariffs. The US move rattled world markets as fears of higher supply chain costs and a subsequent recession surfaced,” added Coforge’s annual report.
At least one analyst attributed this to prevailing trade ties between India and the US.
“It is likely (because of) the overall trade climate between the two countries. They may be concerned that firms will be hesitant to move work or keep work in India, fearing a further escalation in tensions between the two nations. For example, if India does indeed back away from its US ties and moves closer to China, it is likely that the US would take further measures which would impact service trade,” said Peter Bendor-Samuel, founder of Everest Research.
The US government’s imposition of 50% tariffs on Indian goods took effect on 27 August. This led to Modi promising a “massive tax bonanza” for citizens in Diwali to mitigate the damage from the US tax imposition. Manufacturing, retail and healthcare are some of the sectors expected to face issues.
Most recently, tensions started to simmer further after Modi met Chinese President Xi Jinping and Russian President Vladimir Putin in China’s Tianjin. He invited global leaders from the Shanghai Cooperation Organisation to invest in the country. Trump was not pleased, calling India-US trade relations a “one-sided disaster.”
While Coforge was the latest company to call out trade disputes as a risk, others have sounded caution in the past.
Business risks
“HCLTech is exposed to risks from international political events, including wars, trade disputes, sanctions, political instability and social unrest. These factors can disrupt operations, affect supply chains, influence market access and impact profitability in regions where HCLTech operates,” read HCLTech’s FY25 annual report.
Smaller peer Wipro echoed a similar opinion.
“Extreme protectionism, the imposition of tariffs, and trade wars may also result in weaker global trade and economic activity, which could adversely affect our business,” according to Wipro’s annual filing with the US Securities and Exchange Commission.
Even amongst the country’s IT mid-caps, LTIMindtree was the first to call this out.
“US policy under the new administration is expected to bring significant changes in trade, fiscal, and industrial policies, impacting the global economy in the long term. Additionally, trade-war dynamics, especially between the US and China, are expected to intensify, contributing to increasing global trade fragmentation and higher costs for consumers and businesses,” read the sixth-largest LTIMindtree’s annual report.
HCLTech, Wipro and LTIMindtree ended last year with $13.8 billion, $10.5 billion, and $4.49 billion, respectively.
As part of their contingency plans, most homegrown IT outsourcers are expanding their operations across countries and segments to offset adverse trade impacts. Mint reported on 26 August that the country’s largest information technology services companies are increasingly placing bold bets on markets like Australia, Japan, South Korea and the Philippines as their biggest growth markets remain stubbornly stagnant.
Cash flow strains
Still, analysts say Coforge faces another challenge.
“Aggressive investments in capacity and acquisitions have meant that free cash flow (FCF) growth has lagged both mid-cap and large-cap peers,” said Motilal Oswal Financial Services analysts Abhishek Pathak, Keval Bhagat, and Tushar Dhonde, in a note dated 28 August.
Coforge spent more money than it earned through its operations, as negative free cash flow totalled $21.5 million last quarter.
However, analysts are bullish on the company, primarily because of the $1.83 billion, 13-year deal it signed with Texas-based Sabre, a travel tech company, in March.
“There are reparations to be made in FCF conversion as the company absorbs past investments and optimizes working capital. However, we believe the foremost driver for re-rating remains earnings growth, and Coforge’s sustained growth trajectory and deal pipeline leave it well positioned,” said the Motilal Oswal analysts.
The company’s Cigniti acquisition is also expected to propel growth.
In December, Coforge completed the acquisition of Cigniti, a software testing services firm. It paid $220 million for a 54% stake in Cigniti. The acquisition was expected to increase the IT company’s business by establishing three new verticals: retail, hi-tech, and healthcare.