Indian IT braces for muted Q1 as AI, geopolitical risks weigh on growth

Indian information technology companies are expected to report subdued results for the first quarter of fiscal 2027 as weak discretionary spending, geopolitical uncertainty and the growing adoption of artificial intelligence weigh on demand and revenue growth.

The slowdown comes during what has traditionally been a strong quarter for the sector. Clients are taking longer to approve projects, holding back non-essential technology spending and increasingly demanding that IT vendors pass on productivity gains generated through AI.

“Volatile macro conditions, geo-political issues and increasing demand to pass-on AI-led productivity gains from enterprise clients could result into Q1 being a quarter of soft sales growth for many companies,” said Sandeep Shah, director at Equirus Securities.

Shah expects clients to remain cautious about discretionary spending, which would be necessary for any meaningful scale-up in AI adoption.

Concerns over global technology demand intensified after Accenture last month lowered its revenue outlook for FY26, despite reporting year-on-year revenue growth. The revision has raised concerns that Indian IT services companies could also lower their guidance or growth projections for the current fiscal year.

Tata Consultancy Services will kick off the Indian IT earnings season with its first-quarter results on Thursday, July 9.

Large firms under pressure

The ongoing conflict in the Middle East has added to macroeconomic uncertainty, prompting clients to pull back on discretionary spending. The impact is expected to be more pronounced for large, Tier-I service providers, while mid-cap companies could report relatively stronger growth.

Jefferies expects aggregate revenue growth for the sector to remain flat sequentially and rise about 3.5% year-on-year in constant currency terms.

“Among large IT firms, Infosys and Tech Mahindra are likely to outperform while Wipro, TCS and LTM are likely to report muted revenue growth. Within mid-sized firms, Hexaware will lead on organic revenue growth while Coforge will lead on overall growth due to two months’ contribution from Encora,” the brokerage said.

Margins are also expected to remain under pressure because of wage increases. The depreciation of the rupee against major currencies, including the US dollar, euro and British pound, could offer some relief.

Jefferies expects aggregate margins to decline by about 30 basis points sequentially. TCS could report a 120-basis-point contraction because of wage hikes, while Tech Mahindra may post a 50-basis-point improvement.

“The Indian IT services industry is experiencing a multi-layered demand reset, driven by cyclical softness and structural shifts in tech adoption. Discretionary spending remains under pressure, as enterprises prioritise cost optimisation and defer non-essential programs amid macro uncertainty. Simultaneously, the emergence of AI is reshaping both demand composition and revenue realisation models,” Emkay Research said in a report.

These factors are extending sales cycles, slowing the deal pipeline and delaying the conversion of contracts into revenue.

AI projects, but pricing pressure

Although IT companies have highlighted an increase in AI-related projects, much of the demand continues to be focused on improving productivity rather than expanding clients’ revenue.

This is creating pressure on pricing and forcing IT companies to restructure traditional service models, according to Emkay.

The brokerage expects constant-currency revenue growth for Tier-I firms to range between a decline of 1.2% and growth of 2.2%. Reported dollar revenue growth could face a further 10-30 basis-point impact from cross-currency headwinds.

Tier-II companies could report constant-currency growth ranging from a decline of 0.5% to an increase of 4.3%.

Analysts will closely watch whether the rise in AI projects represents incremental spending by enterprises or merely a reallocation of existing technology budgets.

Brokerages expect the near-term demand outlook to remain measured, with enterprises continuing to exercise caution on discretionary expenditure.

“We expect AI-led transformational investments are likely to be funded by cost-take out, outsourcing and vendor consolidation-led deals instead of a notable increase in the IT budget in the near term. For 1Q, we expect mixed trends on deal TCV,” Shah said.

Among key industry verticals, banking and financial services are expected to deliver healthy growth. Manufacturing and automotive clients, however, could report weaker demand.

Engineering services company KPIT Technologies recently warned that its first-quarter revenue would be affected by a sudden reduction in spending by European automakers.

Long-term AI opportunity

Despite the near-term pressure, analysts remain positive about the longer-term outlook for Indian IT services companies. System integrators are expected to play a critical role as large enterprises build increasingly complex AI infrastructure.

“We believe that large clients’ AI architecture will be complex, with a hybrid model involving a combination of LLMs, SLMs, frontier models and open-source models, besides multiple agents at the top talking with various applications, databases, etc., in a governed fashion to produce trustworthy output, and hence requires assistance from SIs,” Emkay said.

The sector has also witnessed heightened merger and acquisition activity in recent months as companies seek greater scale and access to new markets.

This represents a shift from the earlier strategy of pursuing smaller, tuck-in acquisitions aimed at gaining niche capabilities. Companies are now exploring larger, transformational transactions designed to build long-term competitive advantages.

The impact of these deals on growth, margins and client acquisition will become clearer over the coming quarters.

For now, investors and analysts will focus on management commentary around the deal pipeline, the commercial impact of AI rollouts and the demand outlook beyond the first quarter to assess how the rest of FY27 could unfold.