Indian IT firms face subdued growth as budgets shift to AI, GCCs

India's IT companies are expected to report another quarter of subdued earnings growth due to client-specific issues, geopolitical uncertainty and enterprises redirecting technology budgets towards artificial intelligence (AI) and Global Capability Centres.

India's Information Technology (IT) companies are expected to report another quarter of subdued earnings growth despite seasonal strength, due to client-specific issues, weakness in select verticals and geopolitical uncertainty.

Challenging Outlook for IT Sector

Addressable tech spending in Indian IT companies is expected to remain softer year-on-year as enterprises redirect technology budgets towards artificial intelligence (AI) initiatives and Global Capability Centres (GCCs), according to a report by Systematix Research.

The report indicates that the outlook for the sector would remain challenging over the next few years, with tier-one IT companies expected to deliver annual revenue growth in the range of -1 per cent to 5 per cent, constrained by AI-led pricing pressure, weak discretionary demand and macroeconomic uncertainty.

"IT services companies are expected to report another quarter of muted growth despite seasonal strength," the report said, adding that net profit growth is also expected to follow muted revenue growth due to protection strategies against currency fluctuations at some companies.

Company-Specific Guidance

Among major IT firms, Infosys is expected to raise the lower end of its FY27 revenue growth guidance to 2.5-3.5 per cent, including acquisition-related contributions, while HCL Technologies is likely to maintain its existing guidance. Wipro is expected to guide for -1.5 per cent to 0.5 per cent constant currency revenue growth for the second quarter of FY27.

Quarterly Performance Expectations

The report expects large IT companies to post constant currency revenue growth ranging between -1.8 per cent and 1.1 per cent quarter-on-quarter in the June quarter, while mid-tier firms are likely to outperform, led by Persistent Systems and Mphasis.

Deal wins, however, are expected to remain broadly stable.

Profitability is also expected to remain under pressure. Systematix estimates margins for large IT companies could contract by 10 to 100 basis points, quarter-on-quarter due to wage revisions, weak operating leverage, investments in AI capabilities, restructuring costs, higher amortisation expenses and cross-currency headwinds.

The brokerage also said it does not expect any meaningful currency tailwinds during the quarter.

Stock Valuations and Investor Outlook

Despite the weak near-term outlook, the report noted that the sharp correction in IT stocks has improved valuations. The Nifty IT index has declined around 31 per cent over the past year, bringing valuation multiples to historically attractive levels, while companies continue to generate healthy cash flows and maintain strong payout ratios. (ANI)

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