A recent report by Motilal Oswal Financial Services indicates a challenging period ahead for Indian IT companies, with demand commentary expected to remain soft through the first quarter of fiscal year 2027 (1QFY27). This weakness, driven by macroeconomic pressures, uncertainty around artificial intelligence (AI) adoption, and geopolitical overhangs, is weighing heavily on discretionary spending and decision-making cycles within the sector.
Demand Outlook and Guidance Risks
The brokerage anticipates that the sluggish start to FY27 could extend into the second quarter. With the first half of the fiscal year projected to fall short of the pace required to meet the upper end of existing FY27 guidance bands, several companies may be compelled to revise their targets downwards.
- Infosys: May see the upper end of its FY27 guidance cut by approximately 50 basis points.
- HCL Technologies: Could reduce the upper end of its services growth guidance by 100 basis points.
For its broader coverage universe, Motilal Oswal forecasts a year-on-year revenue increase of 14.4%, with EBIT rising 16.4% and PAT growing 13.3% in rupee terms. Constant-currency growth for 1QFY27 is projected between -1.5% and 2% for large-cap firms, and -1% to 4.8% for mid-caps, with the latter benefiting from large deal ramp-ups.
Company-Specific Expectations
Individual performance within the large-cap segment is expected to vary significantly:
- Tata Consultancy Services (TCS) and LTIMindtree: Both are expected to report flat quarter-on-quarter constant-currency revenue. TCS is scheduled to announce its Q1 results on Thursday, July 9.
- Infosys: Anticipated to lead large-cap growth, potentially achieving around 2% or 1% organically, bolstered by recent acquisitions.
- Tech Mahindra: May post approximately 1% growth, driven by ramp-ups from telecom deals.
- HCL Technologies and Wipro: Both are projected to experience declines due to specific client issues, delayed project ramp-ups, and seasonal weaknesses.
Cross-currency headwinds of 20-50 basis points are also expected across most firms.
Mid-Tier Performance and Vertical Trends
Among mid-tier companies, Hexaware Technologies is predicted to lead growth at roughly 4.8% quarter-on-quarter in constant currency, followed by Persistent Systems at about 3%, and Mphasis and Tata Technologies each at approximately 2%. Coforge and Zen Technologies are expected to remain flat.
Vertical trends present an uneven picture:
- BFSI (Banking, Financial Services, and Insurance): Remains the most resilient sector, supported by deal ramp-ups and stable spending.
- Hi-Tech: Mixed performance, with AI-related work partially offsetting client-specific weaknesses in certain portfolios.
- Telecom: Continues to be soft.
- Manufacturing: Demand is uneven across automotive and industrial clients.
Recent commentary from Accenture also highlights slower decision-making processes and continued caution among clients.
Margin Outlook and Valuations
Margin performance is expected to be mixed:
- Infosys and HCL Technologies: May see improvements of around 40 basis points each.
- Tech Mahindra: Could achieve another quarter of approximately 50 basis points expansion, aided by Project Fortius and delivery efficiencies.
- TCS: A sharp decline is anticipated due to annual wage hikes.
- LTIMindtree: Margins are likely to remain broadly stable.
In the mid-cap space, Hexaware, Mphasis, and KPIT Technologies may show modest improvements, while Coforge, Persistent Systems, Wipro, Tata Elxsi, and Zen Technologies could face margin pressure. Tata Technologies' margins should improve due to better utilization.
Motilal Oswal has adjusted target multiples downwards by 15-20% across most of its coverage to reflect the slower growth outlook. Tier-I valuations are currently 30-40% below their 10-year and 5-year averages, with TCS and Infosys trading near -1 standard deviation P/E levels. A significant rerating for the sector would necessitate clearer signs of demand improvement, stabilizing revenue growth, and AI-led opportunities scaling sufficiently to offset productivity-related headwinds.