India’s top IT companies are set to kick off the Q1 FY27 earnings season. The expectation is fairly glum as Artificial intelligence (AI) led pricing pressure, Middle East war and a challenging demand environment continue to weigh on the sector.
Companies are expected to report muted revenue growth, likely guidance cuts and mixed margin performance.
Key brokerage houses like Kotak, Motilal Oswal and Nomura expect IT firms to face pressure on profitability as annual salary hikes, continued investments in AI and currency-related headwinds offset the benefits of cost-saving measures and a depreciating rupee.
IT Q1FY27 preview: Stable margins but subdued revenue growth
Motilal Oswal believes that one can “expect a slow start to FY27 for the Indian IT services sector, with demand commentary likely to remain soft through Q2FY27 amid AI, macro and geopolitical overhangs that continue to weigh on discretionary spending and decision-making cycles,” Motilal Oswal noted.
Kotak Institutional Equities shares the same sentiment that “Q1FY27 will be weak on revenues for the sector”.
Kotak expects most large IT companies to post constant currency revenue growth in the range of -1% to 1% during the June quarter, despite it being a seasonally strong period. “Most large companies will struggle to hit the midpoint of their FY27 guidance,” Kotak noted.
The brokerage firm believes IT EBIT margin for most companies, except for TCS, to remain largely stable. “The pricing pressure in the IT industry is getting cushioned by rupee depreciation. However, the translation of rupee depreciation into net profit may not be immediate for many companies due to cash-flow hedging,” Kotak noted.
IT Q1FY27 preview: Guidance cuts likely
Motilal Oswal believes some large IT companies may trim the upper end of their FY27 revenue guidance after a weak first half.
“We therefore expect companies to walk back the top end of their guidance bands this quarter,” the brokerage said.
It expects Infosys to lower the upper end of its FY27 revenue growth guidance by 50 basis points. HCLTech could reduce the upper end of its services revenue growth guidance by 100 basis points.
‘Perfect storm’ of global uncertainty and AI disruption
Nomura expects the upcoming earnings season to remain subdued as the IT companies are currently facing a “perfect storm” of two major challenges.
“First, the macro uncertainty emanating from the ongoing Middle-East conflict and uncertainty around rates, particularly in the US, is keeping client spending subdued at the margin level,” the brokerage said.
“Second, when tech spending from clients are not increasing, there is heightened competition among IT services companies and the economic dividend of AI is being immediately surrendered to clients.” Nomura added.
It expects mid-cap IT companies to continue outperforming large-cap peers.
Among large-cap companies, Wipro is expected to report the weakest constant currency revenue performance with a 1.3% sequential decline, while Tech Mahindra may post the strongest growth at around 1%.
The brokerage expects TCS revenue to remain largely flat sequentially, while HCLTech may report a 0.8% decline and Infosys may deliver around 1.5% growth in constant currency.
Accenture commentary raises concerns over demand
JM Financial also said that June quarter, usually a strong period for IT sector, remain under pressure this time. Recent commentary from global IT major Accenture also points to the possibility of further earnings downgrades in the September quarter, JM Financial noted.
JM Financial expects India’s top six IT companies to report constant currency revenue growth between 0.7% and 6.6% year-on-year during the June quarter. On a sequential basis, revenue is expected to remain largely flat, ranging between a 1.2% decline and a 2% increase.
Mid-sized IT companies are likely to perform better than large-cap peers. Hexaware and Mphasis are expected to post healthy growth, while Tata Technologies Technologies is likely to stand out among engineering research and development companies.
Among BPO firms, Sagility is expected to continue delivering strong growth.
Conclusion
Against the backdrop of Middle East conflict, AI-led pricing deflation and rupee depreciation, investors are expected to focus on FY27 guidance and demand outlook. Though June is a relatively stronger quarter for the tech companies, most brokerages a rather muted financial performance in Q1 this year. Focus will be on the guidance and indication of future demand.