India's IT sector expected muted Q2FY27 growth amid pricing pressure and geopolitical headwinds

Synopsis

India's IT sector is expected to see limited growth in Q2FY27 due to various pressures and headwinds. Predictions indicate large-cap firms might experience a modest revenue increase, while mid-cap companies could outperform. Although margins might improve slightly, profitability could continue facing challenges from investment needs. The Nifty IT index has dropped significantly, reaching multi-year lows due to weak demand.

New Delhi: India's IT sector is expected to post another quarter of muted growth amid pricing pressure, competitive bidding and geopolitical headwinds, while margins are likely to remain stable, as per a report by Systematix Institutional Equities.

As per Systematix, large-cap IT companies are expected to post muted organic revenue growth in Q2FY27, with growth ranging up to 2 per cent.

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"Tier-I IT companies are expected to post muted organic QoQ CC revenue growth of -1.5% to 2.0% in 2QFY27E," it said.

Growth in banking, financial services and insurance (BFSI), manufacturing and healthcare, along with easing client-specific headwinds, is expected to be offset by weakness in other verticals, AI-led pricing pressure, competition and geopolitical risks. Mid-cap IT firms, however, are expected to continue outperforming their larger peers.

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Margins at large IT services firms are expected to improve modestly quarter-on-quarter.

"Margins at large IT services firms are expected to improve modestly QoQ, as cost efficiencies and currency tailwinds partly offset pricing pressure and wage hikes," it said.

However, with most levers already deployed and surging investment needs, "profitability may remain under pressure."

At the same time, the brokerage house expects some large IT firms to report forex losses regarding cash flow hedging.

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On valuations, the report noted that the Nifty IT index has declined about 30 per cent over the past year, pushing valuations of most IT services stocks to multi-year lows and steep discounts to their 10-year averages.

The correction reflects weak demand, AI-led deflation and macroeconomic headwinds. However, resilient margins, healthy cash generation and deal wins provide support, while attractive payout and free-cash-flow yields and lower AI token costs could create opportunities for leading IT services companies.

"Current multiples imply modest growth expectations, while payout and free-cash-flow yields remain attractive. Lower token costs could also create significant opportunities for leading IT-services firms. We see limited downside to valuations from current levels," it said.