India Inc is entering the Q2 earnings season and the focus is again on the IT services sector, typically among the first ones to declare their results. Given the current challenges, including a weak rupee, high yield and ongoing geopolitical challenges, it would be interesting to see how big tech giants are navigating AI-led deflation and weak demand.
The Nifty IT index has gained 6.52% over the past three months, outperforming the broader market. But can IT companies deliver a similar performance on the earnings front? Kotak Institutional Equities expects another muted quarter for large IT companies, saying that “demand conditions have neither improved nor deteriorated since the June 2026 quarter.”
The brokerage also expects the growing impact of AI-led deflation to weigh on revenue growth.
IT Q2 earnings preview: AI deflation becomes visible in existing business
Companies are increasingly using AI tools to improve productivity, which could reduce the amount of work required for some existing services. However, Kotak estimates a gross deflation of around 7% and net deflation of 3.5% due to AI adoption.
Most enterprises are currently focusing on cost optimisation and productivity savings from AI rather than generating significant new revenue through AI-based use cases.
“Companies’ investments in AI initiatives are still in early stages,” Kotak said, adding that there has been a significant increase in the adoption of open-source and open-weight models. The brokerage noted that while open LLMs could create an incremental opportunity for IT services providers, they could also increase deflationary pressure as adoption rises.
IT Q2 earnings preview: Pricing pressure remains a key risk
AI-related revenue opportunities are growing but are not yet sufficient to fully offset deflation in existing business.
Competitive intensity is high for vendor-consolidation deals, while clients are also seeking productivity concessions during contract renewals and retaining a larger share of the savings generated through AI.
As a result, winning a large deal does not necessarily translate into higher growth for an IT company. “Pricing pressure remains the key risk,” Kotak said.
IT Q2 earnings preview: Competitive advantage for large firms begins to fade
Large IT companies are expected to report modest growth in the September quarter, while mid-sized technology companies are likely to perform better.
Kotak said that the industry benefited for much of the past decade from execution gaps among large vendors but now even that backdrop has changed.
“Tata Consultancy Services (TCS) was absent from several mega-deals, Cognizant went through a prolonged recovery, Tech Mahindra suffered a self-inflicted decline and Wipro faced persistent execution challenges. Stronger players were able to gain share without facing equally capable competition,” Kotak said.
IT Q2 earnings preview: Margins remain stable for now
Margins are expected to remain broadly stable despite the pressure on pricing.
Kotak expects margins at large IT companies to remain stable or decline marginally year-on-year. Rupee depreciation has helped offset some of the pricing pressure.
The rupee has depreciated 0.8% sequentially and 8.4% year-on-year during the quarter. However, the benefit may not immediately flow into reported profit because of cash-flow hedging.
Tech Mahindra, L&T Technology Services, Coforge and Hexaware are expected to report meaningful forex losses.
IT Q2 earnings preview: Deal activity remains healthy but uneven
The overall IT services deal environment remains healthy, but performance varies across companies.
Kotak expects HCL Technologies, Persistent Systems, Coforge and TCS to report strong deal TCVs. Infosys, L&T Technology Services and Wipro are expected to report more muted deal activity.
The conversion of large deals into actual revenue will remain an important factor for the sector in the coming quarters.
AI, pricing and deal conversion remain key factors
TCS is set to kick start the Q2 earning season by announcing their results on October 8. Infosys is set to announce its Q2FY27 results on October 27.
The brokerage expects investors to closely monitor enterprise AI adoption, pricing pressure, large-deal conversion, capital allocation and the growth of AI services.
Overall, the brokerage expects the IT services sector to remain in a transition phase, with AI changing the economics of existing services while companies try to build new AI-led revenue opportunities.