Subdued Start to FY27 for India's IT Sector
India's information technology sector is expected to report a subdued first quarter of fiscal year 2027 (1QFY27), with muted sequential revenue growth across the sector, according to a report by Motilal Oswal. The weak demand environment is anticipated to persist into the second quarter of FY27 (2QFY27), the brokerage said.
Macroeconomic Uncertainty and AI Disruption Weigh on Spending
The report highlighted that macroeconomic uncertainty, AI-led disruption, and geopolitical overhangs continue to dampen discretionary technology spending and lengthen decision-making cycles. This has resulted in a soft demand environment for IT services.
First Half Tracking Below Guidance
Motilal Oswal noted that the first half of FY27 is tracking below the pace required to achieve the upper end of companies' full-year guidance. The brokerage stated that "the ask on 2H to bridge the gap becomes increasingly impractical."
Cautious Commentary Expected During Earnings Season
The brokerage expects demand commentary from IT companies to remain cautious during the upcoming earnings season. It forecasts only tepid quarter-on-quarter growth across its coverage universe in 1QFY27, with the soft start likely extending into 2QFY27. "We build in tepid QoQ growth across our coverage universe for 1QFY27, with the soft start likely extending into 2QFY27 as well," the report added.
Mixed Margin Performance Ahead
On profitability, the report said margin performance is expected to remain mixed across the sector. IT companies are likely to post modest sequential improvement, supported by operating leverage and cost actions. However, some companies will face pressure from weaker operating leverage, employee salary revisions, deal ramp-up costs, and continued investments in artificial intelligence capabilities. "Wage hikes, deal ramp-up costs and AI investments are likely to keep margin expansion selective," it said.
Cross-Currency Headwinds and Guidance Revisions
Most companies are expected to face a modest cross-currency headwind of around 20-50 basis points. The report warned, "We therefore expect companies to walk back the top end of their guidance bands this quarter."
Valuation Correction and Need for Demand Recovery
Although IT sector valuations have corrected significantly, a sustained re-rating is likely only if there is clear evidence of improving demand, stabilising revenue growth, and companies demonstrating that AI-led opportunities are beginning to offset productivity-related headwinds. "Despite valuations having corrected meaningfully, we believe a sustained re-rating will require evidence that demand is improving, revenue growth is stabilising, and companies can demonstrate that AI-led opportunities are beginning to offset productivity-related headwinds," the report concluded.
