IT Sector Braces for Subdued March Quarter Amid Structural Shifts
After a period of significant volatility, the March quarter for India's information technology companies is anticipated to be largely uneventful, with growth constrained by geopolitical uncertainty and the early signs of revenue deflation driven by generative artificial intelligence. IT stocks have already reflected these pressures, declining between 19% and 39% over the past two months as macro headwinds and AI-driven structural changes dampen investor sentiment.
Projected Growth Rates and Sector Performance
Motilal Oswal Research forecasts sequential constant currency growth for large-cap IT firms in the range of -1% to 1.5%, while mid-cap companies are likely to outperform with growth between -0.5% and 3.5%. Kotak Institutional Equities expects muted sectoral revenue growth for the quarter, although the year-on-year trajectory is projected to improve for many players. The absence of furloughs, particularly in the banking, financial services, and retail segments, offers some support, partially offset by fewer working days during the period.
Financial services is expected to be a key driver of sequential growth. Among tier-1 firms, Tata Consultancy Services (TCS) is likely to lead performance, while Persistent Systems may stand out among mid-tier peers.
Currency Impact and Margin Dynamics
A sharp depreciation of the Indian rupee against the US dollar is poised to drive double-digit year-on-year earnings growth for numerous IT companies. Kotak estimates a year-on-year expansion in EBIT margins of 40 to 320 basis points for the top six IT firms, aided by a 6.5% depreciation in the rupee. However, Wipro and HCLTech might experience modest margin declines of 20 to 30 basis points.
The rupee has weakened by 3.5% sequentially, supporting stable to improving margins. Nonetheless, the extent of currency gains will hinge on hedging strategies. Kotak noted that large firms with light hedging are likely to see immediate benefits from the rupee's depreciation.
Deal Momentum and Geopolitical Concerns
While ongoing global conflicts have not materially disrupted earnings thus far, deal momentum could face near-term pressure. A prolonged escalation may weigh on demand, and the full impact of AI-led deflation is expected to unfold over the medium term.
Motilal Oswal indicated that exit growth rates for most large caps appear relatively favorable. For the March quarter, it expects year-on-year constant currency growth exits of 4.3% for Infosys and 4.9% for HCLTech. However, companies are likely to maintain a cautious outlook given the geopolitical backdrop.
Future Guidance and Strategic Outlook
Infosys is anticipated to guide for FY27 revenue growth of 1.5% to 4.5% in constant currency terms. There is potential upside if the company can offset the ramp-down of its Daimler contract through new deal wins. Infosys recently secured a mega $3.2 billion deal from the German automotive major.
Kotak added that rising geopolitical risks and GenAI-led deflationary trends are likely to cap growth guidance despite a healthy deal pipeline. In this context, Infosys is expected to guide for 3% to 5% revenue growth in FY27, while HCLTech may indicate similar growth, supported by its services mix and large deal ramp-ups.
The IT sector remains at a crossroads, balancing short-term currency advantages with long-term challenges posed by AI adoption and global instability. As companies navigate these complexities, their strategic responses in the coming quarters will be critical in shaping the industry's trajectory.
