Weak demand, AI disruption likely to weigh on India’s IT sector through Q2FY27: Report

NEW DELHI: India’s IT sector is likely to report a subdued first quarter of FY27 (1QFY27), 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 (2QFY27), 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)