IT services growth likely to stay soft in near term as clients delay discretionary spends: Equirus
New Delhi, July 5
India's large IT services companies are headed for a muted first quarter, with growth visibility unlikely to improve meaningfully until clients move beyond cost-take-out projects to larger AI-led transformation deals, according to a research report by Equirus Securities.
The brokerage expects demand to remain measured through FY27 as volatile macro conditions and geopolitical uncertainties keep enterprises cautious on discretionary spending. While AI adoption is accelerating, most clients are funding it through productivity gains and vendor consolidation rather than expanding overall IT budgets. That dynamic is likely to cap revenue growth in the near term, even as the sector benefits from currency tailwinds and better margins.
For the June quarter, Equirus expects the Top-6 large IT companies to report constant-currency organic US$ sales growth ranging from a dip of 1.7 per cent to a growth of 1.1 per cent QoQ. Within this, it sees Wipro IT Services near the lower end and Tech Mahindra at the upper end. On a reported basis, CC US$ consolidated sales are expected to range from a decline of 1.1 per cent to growth of 1.7 per cent QoQ, with cross-currency headwinds likely to shave off another flat to 30bps.
The report points to tailwinds from a 3 per cent QoQ depreciation in the average INR/US$ spot rate, benign supply-side pressures, and continued cost optimisation and productivity gains. As a result, EBIT margin execution is expected to remain strong for most large caps in 1QFY27E.
On guidance, Equirus expects some tweaks. It sees Infosys guiding for 2.8-4.3 per cent CC US$ sales growth in FY27E on a consolidated basis excluding the merger and acquisition of Vertex, and 1.5-3.0 per cent excluding both Optimum and Vertex, versus the current 1.5-3.5 per cent guidance. EBIT margin guidance of 20-22 per cent is likely to be retained. For HCL Tech, the brokerage expects no change to the 1.5-4.5 per cent CC US$ services growth guidance and 17.5-18.5 per cent EBIT margin band. Wipro is expected to guide for a CC US$ IT Services decline of 2.0 per cent to flat QoQ for 2QFY27E.
Equirus noted that AI-led transformational investments are being funded by cost savings rather than budget expansion, and deal TCV trends may be mixed QoQ. The key monitorable will be management commentary on the pipeline for transformation deals and growth outlook beyond 1QFY27E.
Valuations have corrected materially in CY26-YTD, pushing FCF yields higher, but Equirus believes multiples may stay measured unless there is consistent improvement in growth visibility beyond this quarter.
The brokerage added that IT services providers will remain critical in the enterprise AI adoption phase, particularly for brownfield work involving legacy modernisation, data engineering, cloud adoption and cybersecurity. It expects large client AI architectures to be complex, with a hybrid mix of LLMs, SLMs and agents, increasing the need for system integrator support.
— ANI
Reader Comments
Interesting analysis from Equirus. The part about AI being funded through productivity gains rather than new budgets makes sense. I work in IT procurement for a US firm and we're definitely doing more with less right now. The currency tailwinds might help Indian companies report decent margins but top-line growth will remain challenged until enterprise confidence improves globally.
Honestly, this is why I've reduced my exposure to IT stocks. The valuations have corrected but multiples will stay compressed until we see consistent growth. The report's point about Wipro being near lower end and Tech Mahindra at upper end is interesting - TechM seems to be turning around. But overall, the near-term outlook is muted. Let's hope the management commentary in earnings calls gives some positive signals.
As someone who recently joined the IT sector, this is a bit concerning 😅. But I think the brokerage is right - AI adoption is going to be a multi-year story and Indian IT companies are well-positioned as system integrators. The mix of LLMs, SLMs and agents sounds complex but that's exactly where our expertise lies. Short-term pain for long-term gain, I guess.
I'm a bit critical of how analysts keep hyping AI without acknowledging the ground reality. Clients are cautious, yes, but Indian IT companies need to move up the value chain. The report mentions legacy modernisation and data engineering - that's bread and butter work. We need more focus on IP-led offerings rather than just cost arbitrage. Hopefully the next few quarters show some structural improvements.
L Lauren Z < We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.