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IT companies are expected to witness moderate improvement in Q2FY27, as macro headwinds from the Middle East conflict continue to weigh on client spending and decision-making. The Fed’s recent 25bps rate hike, its first since July 2023, and the possibility of another hike later in CY26 are likely to keep IT spending decisions muted. AI traction remains healthy, but smaller-sized and shorter-tenure AI projects are yet to offset leakage in traditional services, limiting the pace of revenue growth. We expect median Tier I revenue growth of ~0.9.0% QoQ in CC terms, with growth partly aided by acquisitions, while Tier II companies are expected to outperform with ~2.7% QoQ growth, supported by deal ramp-ups and stronger conversion of recent wins. Currency movements are expected to provide a limited cross-currency impact, with EUR and AUD appreciating 0.3% and 1.0% QoQ against USD, respectively, partly offset by a 0.9% depreciation in GBP. The ~1.0% QoQ depreciation in INR against USD should provide some margin support, albeit lower than in Q1.

ER&D companies barring KPIT are expected to report moderate growth of 1.9% QoQ CC as European auto OEM’s spending slowdown continue to weigh on the segments performance. In the data analytics space LATENVI continue to be impacted by client specific issues while aspiring for strong recovery in H2 but achieving double digit CC USD growth would be tall ask given its weak H1 performance. Within our BPO coverage we expect robust performance by SAGILITY while FSOL should continue its steady growth despite client specific headwinds.

We introduce FY29 est. while our organic FY27E & FY28E revenue est. has been trimmed for most of the name due to muted H1FY27 performance. Despite this our EPS est. has moderately increased (except TCS, LTM & LATENTVI) largely due to INR depreciation. On the guidance front we expect INFO to narrow down its guidance band while HCLT is likely to maintain mid-range of its FY27E organic guidance.

Tier I & II operating performance: Tier I companies are expected to report 1% median QoQ CC growth, led by HCLT (2.4% QoQ CC growth, aided by acquisitions), while WPRO (0.5% QoQ CC decline) and TCS (0.4% QoQ CC growth) will be laggards. Within Tier II companies, COFORGE (11.3% QoQ CC growth) will benefit from 1 month contribution from the Encora acquisition, while PSYS (7.6% QoQ CC growth) will be driven by mega deal ramp up. Among Tier II, we expect KPIT is expected to decline for 2nd consecutive qtr., due to persistent weakness in the auto ER&D spending

On the margins front, we expect Tier I companies median EBIT margin to improve to 21.1%, +40 bps QoQ due to improved performance compared to Q1 while Tier II companies median EBIT margin is expected to remain flat at 15.1%. Within our coverage companies we expect EBIT margin movement between -120 bps to +100 bps.

Valuation and View

The NIFTY IT Index has gained ~8% during Jul-Sep, recovering from the sharp correction in the previous quarter, but remains down ~28% in CY26. Despite the sharp decline, we remain constructively positive on the IT sector, although we expect performance to remain differentiated across segments. We prefer select mid-cap IT and BPO companies, which are better positioned to navigate the current environment, supported by steady deal conversions and ramp-up of recent wins. In contrast, large-cap IT companies continue to face structural headwinds from AI-led deflation and leakage in traditional services, while the Middle East conflict and the Fed’s rate hike are likely to further weigh on enterprise tech spending. ER&D companies are likely to remain under pressure, given continued weakness among European auto OEMs and subdued automotive technology spending.

While near-term growth remains modest, we prefer select mid-caps (COFORGE, MPHL & PSYS) and BPO companies (FSOL & SAGILITY) over large-cap IT and ER&D

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