IT sector likely to see weak 1QFY27; West Asia crisis, GenAI to weigh on revenues: Report
New Delhi, July 3
India's IT sector is likely to see a weak start to 1QFY27, with revenues hit by the West Asia crisis and higher productivity pass-throughs in managed services contracts. Most large IT services companies are also expected to struggle to achieve the midpoint of their FY2027 guidance, according to Kotak Institutional Equities.
Kotak revised its outlook for the sector by trimming FY2027-29 estimated revenue by around 0-1 per cent. It has further slashed fair values by 2-21 per cent.
"We expect companies to be below the midpoint of their annual guidance," it said.
The report attributed the downgrade to two key factors. First, it raised its assumption for GenAI-led pricing deflation to the upper end of the 3-3.5 per cent range, citing faster-than-expected advances in frontier AI models for software-related tasks. Second, it increased its cost of equity assumption to account for higher medium-term disruption risks.
The brokerage house noted, pricing pressure in the IT sector is being partly offset by the rupee's depreciation. During the quarter, the rupee weakened 2.6 per cent sequentially and 9.7 per cent year-on-year.
However, the benefit of the weaker rupee may not immediately translate into higher net profits for many companies because of cash-flow hedging, with major IT companies likely to report significant forex losses.
According to the report, most mid-tier companies have largely locked in FY2027 P&Ls through hedging, typically in the USD/INR range of 90-92. "Currency benefits will therefore not flow through fully to net profit, creating a visible divergence between operating performance and bottom-line growth in FY2027E," it said.
The report also highlighted a sharp pickup in merger and acquisition (M&A) activity across the industry in 2026. It noted that while some deals are aimed at strengthening capabilities and scale, others are focused on expanding sector expertise or geographic presence. A few acquisitions, however, are in service areas that could themselves face GenAI-led pricing deflation.
"The shift worth watching is whether the industry moves further toward AI capabilities and platform M&A or leans on revenue and access deals to support growth," it said.
— ANI
Reader Comments
West Asia crisis hitting IT sector too? First fuel prices, now this. But hey, the rupee depreciation might help exports in the long run. The hedging at 90-92 USD/INR is smart though - atleast companies have some buffer. My concern is the M&A activity they mention - hope companies aren't just buying growth instead of innovating. Indian IT has always been resilient, but we need to stay ahead of the curve, not just react. Yaar, this industry never sleeps 😅
The GenAI deflation point is key. The technology is advancing so fast that traditional IT service models are becoming commoditized. Indian IT must move up the value chain - from body-shopping to true digital transformation partners. Kotak's analysis is spot on about the divergence between operating performance and bottom-line growth due to hedging. But I'm cautiously optimistic - our engineers are some of the best in the world at adapting. Just need leadership to think long-term instead of quarter-to-quarter.
Sigh, another tough quarter ahead for IT employees. The weak guidance and pricing pressure will mean lower bonuses and slower hiring. But honestly, this is a cycle we've seen before. The M&A activity mentioned is interesting - could be consolidating strengths or just buying time. I just hope companies don't use this as an excuse for massive layoffs. We need upskilling and retraining, not just cost-cutting. Indian IT has survived Y2K, dotcom bust, 2008 crisis - we'll get through this too. 💪
The West Asia crisis impact is more than just oil prices - it's affecting client confidence in that region, which is a big market for Indian IT. But I disagree with Kotak's extreme pessimism. Indian IT companies have diversified geographically quite well. The GenAI
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