Results preview: IT companies expected to report sombre Q2 numbers

Indian IT companies are set to report their second-quarter numbers for FY27, with little improvement in the macro environment. This has set the stage for another quarter of low-single-digit sequential revenue growth despite the seasonally-strong period.

 

Persistent macroeconomic uncertainty, geopolitical volatility, artificial intelligence (AI)-led pricing and productivity pressures continue to weigh on demand.

 

The second quarter, a seasonally-strong one before the holiday season kicks in, usually gives the impetus to companies to finish the next six months on a positive note. 

 

Motilal Oswal said it expects demand commentary to remain soft into Q2FY27. This is despite it being a seasonally-strong quarter, as macro pressures, interest rate hikes, AI-related disruptions, and geopolitical overhang continue to weigh on discretionary spend and decision-making cycles.

 

“Against this backdrop, we do not expect quarter-on-quarter (Q-o-Q) growth acceleration across our coverage universe in Q2FY27, with softness likely to extend into Q3FY27 due to furloughs as well,” the brokerage wrote in a note on Thursday.

 

Most brokerages believe a weak second quarter, preceded by a similar in the first, would now force IT companies to cut guidance which would once again put pressure on their share prices.

 

“We expect HCLTech to maintain its FY27 guidance due to better deal visibility. Infosys may lower the upper end of its FY27 organic growth guidance by 25 basis points (bps) if Q2 performance is below expectations,” warned Motilal Oswal analyst Abhishek Pathak.

 

Meanwhile, Kotak Institutional Equities expects Infosys to cut its guidance. “We expect Infosys to cut guidance to 1.5-2.5 per cent growth, down from 1.5-3 per cent; this includes 170 bps contribution from acquisitions. Weak macro and AI deflation will play its part. We expect HCLT’s organic growth guidance to move to 2-3 per cent from 1-4 per cent earlier,” said the Kotak report.

 

Some of the things the Street will look for are commentary on AI-led deals and large deal wins. Recently, larger players have announced large deals such as TCS-Porsche, HCLTech and Mercedez-Benz. 

 

Mid-tier firms, such as Persistent and Coforge, the poster boys of the sector, are expected to perform better than their larger peers such as TCS and Wipro. This is despite the challenges due to their superior ability in execution and securing more AI-led deals.

 

“We expect mid-tier IT revenue (including acquisitions) to grow 2.7–13 per cent constant currency sequentially versus -0.5-2.6 per cent for large tiers, mainly driven by execution. Mid-tier IT is likely to deliver double-digit organic revenue growth in FY27, with strong growth in H1. Large tiers are still working towards achieving mid-single-digit revenue growth in FY27,” wrote JM Financial.

 

The results season will be kicked off by the sector’s largest player TCS on October 8.

 

For IT companies, near-term growth levers remain limited. They are all chasing the same set of large deals, which are essentially vendor consolidation and cost optimisation ones.

 

Such deals have also shrunk in size and intense competition is also putting pressure on margins.

 

They are also facing AI deflationary pressure of about 2-3 per cent annually on their bread-and-butter business, which needs to be offset by AI revenue that will take time to ramp up.

 

They have pegged new revenue from AI services to be worth about $300-400 billion by 2030 as demand for orchestrating workflows for proper returns on AI increases.

 

What should, however, act as a breather for the sector is the fourth-quarter results of Accenture which came out on Thursday.

 

The world’s largest IT player reported a fourth-quarter revenue of $18.7 billion, up 6 per cent and above the company’s guidance range of $17.7-18.4 billion.

 

Accenture numbers are usually a bellwether for the industry and a beat on the guidance could provide some comfort to its Indian counterparts that deal bookings will be better.

 

The company’s new bookings were up 4 per cent to $22.2 billion for the fourth quarter.

 

Margins are expected to remain range-bound for most players, with TCS, HCLTech, Wipro, and LTM expected to see sequential improvement. This would be supported by the reversal of wage hike impacts and cost measures, along with usual second quarter seasonality in the case of HCLTech.

 

Margins for Infosys and Tech Mahindra are expected to remain broadly flat.

 

“Despite the meaningful correction in valuations, we believe a sustained rerating will require evidence that demand is improving, revenue growth is accelerating, and companies can demonstrate that AI-led opportunities are beginning to offset productivity-related headwinds,” said Motilal Oswal.