The IT sector continues to be in the eye of the storm and the mixed performance in Q1 has kept the spotlight on the sector. The midcaps have outperformed the large caps in the current quarter amid geopolitical and AI-led challenges. While the near-term uncertainties are expected to continue in the coming quarters, Axis Securities says that AI can create “a double-edged impact” on the IT sector.
That said, the brokerage firm remains positive on the long-term outlook for Indian IT services.“The long-term outlook remains robust, supported by operational efficiencies, AI-led deal wins and broader economic recovery,” Axis Securities noted.
AI can boost spending but pressure traditional IT services
The AI impact on the IT sector is one of the biggest areas of concern. Axis Securities said looking at the Q1FY27 performance and after tracking commentary from the company, they believe, AI is moving from the experimentation stage to actual enterprise deployment.
“Companies are seeing demand for AI implementation, data modernisation, AI agents and cloud infrastructure, while simultaneously using AI to improve delivery productivity. This creates a double-edged impact, i.e AI can increase addressable spending but can also reduce effort requirements in traditional services, creating pricing/volume pressure,” Axis noted.
In this environment the long-term winners will be companies that can monetise AI while using the technology to improve delivery economics.
Deal ramp-ups, revenue conversion remain key watchpoints
Deal wins are another key factor, along with AI, that will remain important for the IT sector. “The Indian IT services industry has sequential growth backed by deal conversions and AI-led revenue amidst macroeconomic uncertainties,” Axis Securities explained.
However, deal ramp-ups and revenue conversion remain delayed due to higher investments in AI. “Hence, book-to-bill, executable order book and large-deal conversion will be the most important indicators to track over the next few quarters,” Axis noted.
Midcaps to continue outperforming large-cap IT companies
In Q1FY27, IT companies covered by Axis Securities reported constant-currency revenue growth ranging from 0.9% to 16.5% year-on-year (YoY) in Q1FY27. Large cap IT companies reported steady sequential growth in Q1FY27, with profitability remaining under pressure due to higher operating expenses and forex hedge losses. Meanwhile, mid-tier IT companies continued to outperform.
This trend is expected to continue. Axis Securities believes that “earnings growth will continue sequentially across large-cap players, while midcaps will continue to outperform.”
Axis Securities has picked five IT stocks as its top conviction bets for FY27 and none of the top 5 companies by market share made it to the list. The brokerage’s top IT picks with ‘Buy’ ratings are LTM, Tech Mahindra , Persistent Systems, Coforge and Affle 3i.
While we are talking about AI, layoffs and hiring also make it to the conversation. The sector witnessed subdued employee additions across most large IT companies. Midcap companies witnessed relatively stronger headcount additions. Axis said this “indicates that clients are increasingly prioritising productivity, automation and AI-led delivery rather than traditional linear headcount-based growth.”
IT sector Q1FY27 highlights
In Q1FY27, the IT earnings highlighted that business verticals like BFSI, healthcare and life sciences, energy and utilities and travel remained relatively resilient during the quarter. Consumer and retail, hi-tech and communications remained weak as clients stayed cautious on discretionary technology spending.
North America continued to remain strong, while Continental Europe showed better traction. India and selected emerging markets also delivered stronger growth from a smaller base.
IT sector: The trajectory ahead
IT companies also benefited from the rupee’s depreciation, better employee utilisation, deferred wage hikes and tighter subcontracting costs. Overall, Axis Securities highlighted that the key factors to watch in the coming quarter include deal wins, macroeconomic conditions and the ability of major global economies to increase spending on automation.