AI deals seen driving medium-term growth as Indian IT sector faces muted Q2: Report
New Delhi, October 5
India's IT services sector is likely to see muted performance in the second quarter of FY27, but increasing traction in artificial intelligence-related deals could support growth over the medium term, Centrum said in a report.
The report said the demand environment has remained broadly unchanged over the past three months, with clients cautious about AI adoption and longer decision-making timelines weighing on near-term growth. At the same time, the brokerage expects deal booking to remain healthy, with a strong pipeline across most IT services companies.
"AI led deals to be significant drivers of incremental business growth in the medium term," the report said, pointing to the potential for the ongoing AI technology cycle to create new opportunities for Indian IT services companies. It expects the AI-led services market to reach USD 300-400 billion by 2030.
However, the brokerage expects revenue growth across Tier 1 IT companies to remain subdued in the near term. It projects sequential revenue growth in US dollar terms at 0.4 per cent for TCS, 1.1 per cent for Infosys, 1.9 per cent for HCL Tech, a 0.6 per cent decline for Wipro and 1.3 per cent for Tech Mahindra in Q2FY27.
Among Tier 2 companies, the report expects LTIMindtree to grow 1.1 per cent, L&T Technology Services 1.7 per cent, Coforge 3.1 per cent organically, Persistent Systems 6 per cent, Mphasis 1.9 per cent and Happiest Minds 2.3 per cent sequentially in US dollar terms.
Further, Centrum said recently signed deals are largely focused on cost optimisation and vendor consolidation, while the conversion of total contract value into revenue remains soft, indicating that deals are ramping up gradually.
It also noted a marginal improvement in discretionary technology spending in the banking, financial services and insurance (BFSI) and technology sectors, although spending in manufacturing and automotive remains weak.
The brokerage expects operating margins across the sector to remain broadly stable in Q2FY27, supported by a 1 per cent depreciation in the rupee against the US dollar during the quarter, though this could be partly offset by investments in AI.
IT companies are also seeking margin improvement through greater use of AI tools, higher utilisation and changes to their employee mix.
Going ahead, Centrum said management commentary on demand, FY27 revenue and margin guidance, offshoring, hiring and deal booking will be key. It expects the sector's outlook to improve incrementally in FY27, led by growing traction in AI-related deals.
— ANI
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