IT Services Sector Maintains Stable Profitability Amid Modest Growth

Indian IT services companies maintained stable profitability despite weak operating leverage, supported by cost-control measures and favourable currency, a Systemix report said. The sector posted modest QoQ constant-currency growth amid difficult macro conditions.

Despite weak operating leverage and higher investments, IT services companies maintained stable profitability, supported by effective cost-control measures and favourable currency movements, according to a Systemix report.

The sector posted modest revenue growth during the seasonally strong quarter, with Tier-I companies recording quarter-on-quarter (QoQ) constant-currency growth ranging from a decline of 1.2 per cent to growth of 2.6 per cent. The report attributed the subdued growth to company-specific challenges, delays in deal ramp-ups and difficult macroeconomic conditions. Constant-currency growth measures financial performance using fixed exchange rates, removing the impact of currency fluctuations and allowing a clearer comparison of business performance.

Changing Demand Patterns and AI Impact

The report said demand patterns have changed as companies reassessed their operational priorities. New deals were largely focused on cost reduction, vendor consolidation and setting up Global Capability Centres (GCCs). "This along with huge AI investment and elevated demand for productivity gains are expected to keep growth modest in near-to-medium term," the report said.

Company-Specific Performance

Among large-cap IT companies, revenue grew 0.4 per cent QoQ in constant-currency terms. Performance was weighed down by subdued growth at Infosys, HCLTech and Wipro. TCS also recorded 0.4 per cent sequential constant-currency growth, while Tech Mahindra was the best performer among Tier-I companies, posting 2.6 per cent growth. This was its strongest performance in 15 quarters.

Aggregate year-on-year constant-currency growth for large-cap companies improved to 3.7 per cent, compared with 2.5 per cent in the fourth quarter of FY26 and 0.9 per cent in the first quarter of FY26. The report said most large-cap companies saw an improvement in growth, except Infosys and LTM.

Margin Resilience and Profitability Levers

Tier-I companies, excluding Wipro, were able to maintain resilient EBIT margins despite higher employee costs, AI and sales investments, restructuring expenses, competitive pressure and project cancellations. These pressures were offset by tighter execution, optimisation of general and administrative expenses, lower pass-through revenue, better employee utilisation and favourable currency movements.

However, mid-tier IT companies saw a sequential decline in margins due to deal ramp-ups, acquisition-related expenses, higher onsite costs, increased AI usage and lower utilisation. "With limited scope for traditional margin levers, companies are likely to rely on greater internal AI adoption, G&A rationalisation, lower amortisation and operating leverage to sustain profitability," the report said.

Market Outlook and Future Challenges

On the market front, the Nifty IT index has outperformed the broader market by around 3 per cent over the past month. The report said the sector's risk-reward position has become more balanced following the recent rally, while further broad-based valuation expansion could remain limited due to high US Federal Reserve rates, pressure on IT budgets and intense competition. It identified AI-led revenue deflation, declining labour-arbitrage benefits and pricing pressure as key medium-term challenges for the sector.

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