India's IT sector to see weak start to 1QFY27, revenues hit: Report

India's IT sector is set for a weak 1QFY27 start, impacted by the West Asia crisis, Kotak Equities reports. Major firms may miss FY27 guidance due to GenAI pricing deflation and increased costs, despite a depreciating rupee.

India's IT sector is likely to see a weak start to 1QFY27, with revenues hit by the West Asia crisis and higher productivity pass-throughs in managed services contracts. Most large IT services companies are also expected to struggle to achieve the midpoint of their FY2027 guidance, according to Kotak Institutional Equities.

Kotak revised its outlook for the sector by trimming FY2027-29 estimated revenue by around 0-1 per cent. It has further slashed fair values by 2-21 per cent. "We expect companies to be below the midpoint of their annual guidance," it said.

Reasons for Downgrade

The report attributed the downgrade to two key factors. First, it raised its assumption for GenAI-led pricing deflation to the upper end of the 3-3.5 per cent range, citing faster-than-expected advances in frontier AI models for software-related tasks. Second, it increased its cost of equity assumption to account for higher medium-term disruption risks.

Currency Impact and Hedging

The brokerage house noted, pricing pressure in the IT sector is being partly offset by the rupee's depreciation. During the quarter, the rupee weakened 2.6 per cent sequentially and 9.7 per cent year-on-year. However, the benefit of the weaker rupee may not immediately translate into higher net profits for many companies because of cash-flow hedging, with major IT companies likely to report significant forex losses.

According to the report, most mid-tier companies have largely locked in FY2027 P&Ls through hedging, typically in the USD/INR range of 90-92. "Currency benefits will therefore not flow through fully to net profit, creating a visible divergence between operating performance and bottom-line growth in FY2027E," it said.

M&A Activity on the Rise

The report also highlighted a sharp pickup in merger and acquisition (M&A) activity across the industry in 2026. It noted that while some deals are aimed at strengthening capabilities and scale, others are focused on expanding sector expertise or geographic presence. A few acquisitions, however, are in service areas that could themselves face GenAI-led pricing deflation. "The shift worth watching is whether the industry moves further toward AI capabilities and platform M&A or leans on revenue and access deals to support growth," it said. (ANI)

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