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Tier-II Outperformance Widens; Underlying Demand Remains Largely Unchanged: Revenue across our coverage companies remained mostly in line with estimate, with the underlying demand environment largely unchanged. While sequential growth improved for select players, Tier-I performance remained subdued, with growth averaging ~1.1% QoQ versus ~5.4% for Tier-II companies. Among Tier-I, TECHM (+2.4%) and HCLT (+2.3% in services) led sequential growth, followed by INFY (+1.2%), while TCS (+0.5%) remained subdued and WPRO was flat. Tier-II continued to outperform, led by COFORGE (+10.9%), PSYS (+7.8%), ZENT (+4.1%) and MPHL (+3.3%), although inorganic contribution and account ramp-ups explain part of the outperformance. Demand continues to be anchored by cost optimisation, vendor consolidation and AI-led transformation, while discretionary spend remains selective, particularly across segments exposed to slower client decision-making. Importantly, organic growth guidance cuts by INFY and Cognizant indicate that a definitive demand recovery remains elusive. We project FY27 to remain a transition year, with growth increasingly dependent on deal conversion, ramp-up of large programmes and AI-led work translating into incremental revenue. Growth is forecast to remain uneven, with company-specific ramp-ups and portfolio mix driving relative performance rather than a broad-based recovery amid softer demand recovery environment.

Healthy Deal Wins Support Visibility; Revenue Conversion and Deal Economics Remain Key: Deal bookings remained healthy, led by TCS (USD 9.6 Bn TCV), INFY (USD 5.2 Bn in large deals) and HCLT (USD 3.3 Bn), with COFORGE and MPHL also reporting strong deal momentum. However, booking strength is yet to translate into commensurate revenue growth, as phased transitions, staggered ramp-ups and elongated decision-making timelines continue to defer revenue conversion. Further, the increasing prevalence of shorter-cycle AI engagements (typically 1–2 quarters) limits the visibility traditionally associated with large, multi-year TCVs. Overall, we believe that healthy bookings provide a demand cushion, but a meaningful sector recovery will depend on faster deal ramp-ups and conversion into sustainable revenue growth.

Margin Performance Mixed; Operational Efficiency Provides Partial Cushion: Margin remained mixed in Q2FY27, with operational efficiency and cost discipline partly offsetting investments and delivery-related pressure. Tier-I performance was relatively resilient, with TCS sustaining industry-leading margin at 24.0% and INFY at 21.0%, while HCLT led sequential expansion, with reported EBIT margin improving 131 bps QoQ to 18.2% (19.0% adjusted). Tier-II margin was more varied, with COFORGE at 16.0%, PSYS at 15.0% and MPHL at 14.8%. We estimate near-term margin expansion to remain measured, with utilisation, revenue mix and productivity gains determining the ability to absorb wage and AI-related investments.

Valuation: Recent Rally Outpaces Earnings Visibility; Stay Selective: Indian IT valuation rebounded post Q2FY27, with the Nifty IT Index up ~14% in last one month and ~26% from its July 2026 lows, although still negative on YTD basis. The recovery reflects improving sentiment, healthy deal pipelines and better H2FY27 demand commentary. However, risk-reward has now moved to a more balanced zone, making further upside momentum increasingly dependent on execution and earnings delivery. AI is increasingly visible in reported revenue and deal pipelines, although the sector remains at an early stage of translating this opportunity into incremental, profitable growth. Early adoption creating near-term deflationary pressure on effort-based revenues before meaningful AI-led scale-up. Leading providers reported AI-led revenue at around 10% of overall revenue; however, incremental AI demand is being offset by productivity-led deflation in traditional effort-based services. We expect this pressure to persist through FY27–28, with a more meaningful growth inflection likely only from FY29, as AI-related revenues scale up towards 17-20% to the overall mix. With limited visibility on a near-term sector-wide earnings upgrade cycle, absolute upside appears more constrained at the current level. We expect the sector’s re-rating to become increasingly stock-specific and execution-led, rather than broad-based. Within Tier I, we favour TechM & HCL Tech for stronger margin resilience and deal conversion, while COFORGE and MPHASIS remain our preferred companies in the mid-cap, given superior growth visibility, sustained deal momentum and consistent execution.

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