Indian IT services companies are heading into the second quarter of fiscal 2027 with demand conditions largely unchanged from the June quarter, but the impact of AI-led deflation and pricing pressure is becoming increasingly visible. While large-cap IT companies are expected to deliver another muted quarter, mid-cap players are likely to outperform, according to Kotak Institutional Equities.
Infosys Guidance Cut Likely; HCL Tech To Lead Large Caps
Kotak expects Infosys to reduce its constant-currency revenue growth guidance to 1.5-2.5%, from 1.5-3% earlier. The brokerage estimates that acquisitions contribute around 170 basis points to the growth outlook, while weaker macro conditions and AI-led deflation weigh on the underlying business.
For HCL Technologies, Kotak expects organic growth guidance to move to 2-3%, compared with 1-4% earlier. Including the consolidation of the HPE telecommunications business and the Jaspersoft acquisition, overall revenue growth guidance is expected at 3-4%. Wipro is expected to guide for revenue growth of minus 2% to flat.
Kotak expects HCL Tech to lead the tier-1 companies in the quarter, with organic sequential growth of around 2%. Infosys is expected to report 1.1% organic sequential growth, while TCS is seen at 0.5%.
Among hybrid IT companies, Tech Mahindra is expected to deliver stronger growth of 1.6% sequentially, while L&T Technology Services is expected to grow around 1%.
Mid-caps Expected To Outperform
The growth picture is expected to be stronger among mid-tier IT companies. Persistent Systems is forecast to grow 7% sequentially, supported by the ramp-up of a mega deal. Coforge is expected to grow 4.5%, while Mphasis is estimated to grow 3.5%. Kotak expects ER&D companies to report lacklustre growth, while Sagility is expected to lead among BPO peers.
Kotak said challengers continue to offset AI-led deflation through market-share gains and stronger execution, while incumbent IT companies are largely focused on defending existing revenues.
Kotak said AI is increasingly changing the economics of IT services rather than eliminating demand for services altogether. However, pricing pressure and the inability of incumbent companies to sustain growth beyond the mid-single digits could cap upside for the sector. AI-led revenue opportunities are growing, but are still insufficient to fully offset deflation in the existing book. Competitive intensity has also increased as execution levels across large IT vendors have improved.
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The brokerage said clients are increasingly embedding productivity concessions into contract renewals and capturing a greater share of AI-driven savings. Repricing is also not a one-time event. Much of the time-and-materials book has already undergone repricing as code assistants and AI agents improve developer productivity, while fixed-price application maintenance services face greater pressure due to more frequent renewals.
Kotak currently assumes that around 50% of the impact from deflation will eventually be reinvested into new AI-enabled business use cases.
Despite pricing pressure, margins are expected to remain broadly stable for now, helped by the depreciation of the rupee. The rupee weakened 0.8% sequentially and 8.4% year-on-year during the quarter. However, the impact on reported net profit could vary significantly because of hedging positions. Tech Mahindra, L&T Mindtree, Coforge and Hexaware are among companies expected to report meaningful forex losses.
Kotak said investors may therefore need to look beyond reported net profit growth to assess underlying operating performance.
Citi Also Sees Another Subdued Quarter
Citi expects Indian IT services to enter a fourth consecutive year of subdued growth. It estimates constant-currency organic services revenue growth of between minus 0.7% and 1.5% sequentially for the leading six companies. The brokerage expects near-term weakness to persist and flagged margins as another key focus area as currency benefits are expected to be more limited in the September quarter.
Citi earlier had retained its Sell rating on TCS while cutting its target price to Rs 1,875 from Rs 2,040 and lowering its target multiple to 12x from 13x. For Infosys, Citi retained its Neutral rating but reduced the target price to Rs 1,030 from Rs 1,115 and lowered its target multiple to 13x from 14x, citing continued sector challenges and the recent sector re-rating.
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