Weak demand, AI disruption likely to weigh on India's IT sector through Q2FY27: Report
New Delhi, July 2
India's IT sector is likely to report a subdued first quarter of FY27, which could result in muted sequential revenue growth across the sector, as the weak demand environment is expected to persist into the second quarter of FY27, according to a report by Motilal Oswal.
The report noted that macroeconomic uncertainty, AI-led disruption and geopolitical overhangs have continued to weigh on discretionary technology spending and decision-making cycles, resulting in a soft demand environment.
Apart from this, the first half of FY27 is tracking below the pace required to achieve the upper end of companies' full-year guidance; hence, "the ask on 2H to bridge the gap becomes increasingly impractical."
The brokerage expects demand commentary from IT companies to remain cautious during the earnings season, with only tepid quarter-on-quarter growth anticipated across its coverage universe in 1QFY27. The soft start is likely to extend into 2QFY27, reflecting continued weakness in discretionary spending by global clients.
"...we build in tepid QoQ growth across our coverage universe for 1QFY27, with the soft start likely extending into 2QFY27 as well," it added.
On profitability, the report said margin performance is expected to remain mixed across the sector. IT companies are expected to post modest sequential improvement, supported by operating leverage and cost actions, it said.
As per the report, some companies will likely face pressure from weaker operating leverage, employee salary revisions, deal ramp-up costs and continued investments in artificial intelligence capabilities. "Wage hikes, deal ramp-up costs and AI investments are likely to keep margin expansion selective," it said.
In addition, most companies are expected to face a modest cross-currency headwind of around 20-50 basis points.
"We therefore expect companies to walk back the top end of their guidance bands this quarter," it said.
The report added that although IT sector valuations have corrected significantly, a sustained re-rating is likely only if there is clear evidence of improving demand, stabilising revenue growth and companies demonstrating that AI-led opportunities are beginning to offset productivity-related headwinds.
"Despite valuations having corrected meaningfully, we believe a sustained re-rating will require evidence that demand is improving, revenue growth is stabilising, and companies can demonstrate that AI-led opportunities are beginning to offset productivity-related headwinds," it said.
— ANI
Reader Comments
As someone working in IT, I can confirm the ground reality is tough. Clients are delaying decisions and cutting budgets. But the report is right - we need to see AI as opportunity, not just threat. Companies should focus on AI-enabled solutions instead of traditional outsourcing models. Change management is key now.
From a shareholder perspective, it's disappointing but not surprising. Indian IT companies have been too dependent on US and European markets. We need to diversify into domestic digital transformation, government projects, and emerging markets. Also, the report mentions wage hikes affecting margins - that shows we can't compete on cost forever. Time for value addition.
I've been following Indian IT stocks for years. The valuations correction might be a buying opportunity for long-term investors, but the near-term outlook is definitely weak. What bothers me is that management commentary remains too optimistic even when ground reality is different. They need to be more realistic with guidance.
The report's point about AI investments eating into margins is spot on. But it's a necessary evil. If Indian IT firms don't invest heavily in AI now, they'll become irrelevant in 5 years. The challenge is balancing short-term earnings pressure with long-term survival. Hope investors have patience for this transition. भारत को आगे बढ़ना होगा 🇮🇳
Weak demand is a global phenomenon - not just India specific. But what worries me is the "AI-led disruption" narrative. Our firms have always been good at body shopping and low-cost models. Now with generative AI doing coding and testing, that model is
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