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Recovery Deferred; Estimate & Multiples Reset

Q1FY27 is shaping up to be another weak print for Indian IT, with demand conditions deteriorating rather than stabilising and highlights which demand recovery has been pushed further out. Persistent macro uncertainty, slower enterprise decision-making, elevated AI-led productivity pass-throughs and geopolitical disruption have kept discretionary spending under pressure, resulting in muted sequential growth across the sector. Large-cap IT is expected to report broadly flat to marginally negative constant-currency growth, while mid-tier companies should once again outperform on the back of deal ramp-ups and market share gains. With H1FY27 growth tracking below the run-rate required to meet annual guidance, we can expect further estimate revision and selective guidance resets in the next few quarters

Accordingly, we cut our FY27–28 earnings estimate (0.1%–16.7%) across the sector to reflect a slower demand recovery, weaker discretionary spending and higher AI-led revenue deflation, while reducing target multiples and fair values (0%–21.6%) to incorporate weaker medium-term growth visibility and higher execution risk. Although sector valuations have corrected meaningfully and downside appears increasingly limited, we believe a sustained re-rating will require a clear evidence of demand stabilisation, accelerating revenue growth and commercial monetisation of GenAI beyond productivity-led cost takeout.

Weak Revenue Print in a Seasonal Strong Q1; Tier II to Outperform

We forecast Tier-I IT companies to report muted sequential USD revenue growth in the range of -0.6% to 1.0% QoQ, reflecting continued weakness in discretionary spending, AI-led productivity pass-throughs to clients and delays in deal ramp-ups. TCS and INFO are expected to deliver modest growth of 0.9% and 1.0% QoQ respectively, while WPRO (-0.3% QoQ) and HCLT (-0.6% QoQ) are likely to be impacted by client-specific headwinds and slower project transitions. TECHM is expected to post 0.6% QoQ USD revenue growth, supported by the ramp-up of a large telecom deal, partly offset by continued softness in the Hi-Tech vertical. In contrast, Tier-II companies are expected to outperform with 2.0–4.5% QoQ USD revenue growth, led by healthy deal momentum, particularly in BFSI. We believe the BFSI vertical will remain the key growth driver across the sector, while geopolitical uncertainty, including the Middle East conflict and emerging AI-led deflationary pressure is likely to keep client decision-making cautious

Margin Outlook Stable as FX Gains & Efficiency Offset AI Investment

We expect margin across Tier I IT companies to remain broadly stable, supported by AI-led internal productivity gains, favourable FX movements and ongoing costoptimisation initiatives, offset by continued investments in AI capabilities. TECHM is likely to outperform with 25 bps QoQ margin expansion driven by delivery efficiency and Project Fortius, while LTM may see a modest 10 bps improvement aided by FX gains and operational efficiency despite wage hike. Wage revisions are expected to pressure TCS and WPRO, partially offset by rupee depreciation. Tier II players are likely to report mixed margin, reflecting AI investments, large deal transition costs (for ZENT), improved utilisation and currency tailwinds.

View: Recovery still Elusive, FY27 Recovery Deferred

Q1FY27 is likely to remain another subdued quarter for Indian IT sector, with demand conditions showing only gradual improvements amid persistent macro uncertainty and AI-led pricing pressure. Although deal pipelines remain healthy, longer decision cycles and phased deal ramp-ups are likely to delay revenue conversion, keeping near-term growth modest. The industry is increasingly pivoting towards capability-building through acquisitions, particularly in AI, engineering and platform-led services, reflecting focus strengthening long-term positioning rather than replying on organic demand recovery. We believe sustained revenue acceleration will require a broader revival in discretionary spending and tangible monetisation of AI investments, both of which are still evolving. Therefore, management commentary is expected to remain constructive on medium-term outlook, but measured on near-term demand, with execution, large deal conversion and AI commercialisation likely to be the key themes over the next few quarters.

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