Q1FY27 earnings preview: TCS expected to kick off tech earnings season on a sombre note

On the back of IT major Accenture's earnings last month, in which the company lowered its full-year revenue growth guidance to 3%–4% from the earlier 3%–5%, analysts are factoring in growth concerns for IT companies in the first half of FY27.

With India's largest IT and consulting company, Tata Consultancy Services (TCS), set to kick off the IT earnings season on July 9, analysts expect tepid growth amid macroeconomic headwinds, such as the war in the Middle East, subdued client spending, particularly in the US, and uncertainty surrounding artificial intelligence-driven technology spending.

What do analysts expect from TCS in Q1FY27?

Brokerages expect a subdued quarter for TCS, with the Middle East conflict, delays in project ramp-ups, vertical-specific weakness, and the impact of wage hikes likely to weigh on the company's financial performance in the first quarter.

Nomura expects TCS to report flat sequential revenue growth in constant currency terms and estimates a 100-basis-point quarter-on-quarter decline in EBIT margin due to salary hikes, partly offset by favourable currency movements, and other cost-efficiency initiatives. Analysts will closely watch the management's commentary on the demand outlook, restructuring and its impact on the business, discretionary spending by clients amid rising macroeconomic uncertainty in the US, the impact of AI adoption and the ongoing Middle East conflict, cost optimisation projects, and the performance of the BFSI vertical.

Motilal Oswal Financial Services also expects TCS to report flat sequential growth in Q1, with continued weakness in the Communications vertical likely to offset growth in the BFSI and Consumer segments. It also sees cautious discretionary spending across the Manufacturing sector and in North America will weigh on growth. It expects TCS' EBIT margin to decline 140 basis points quarter-on-quarter to 23.9%, primarily due to the annual wage hike effective from April, although this is likely to be partly offset by productivity gains, operational efficiencies, and favourable currency movements. However, the brokerage believes TCS' AI-led services momentum, along with its recent acquisitions of Coastal Cloud and List Engage, should support the company's medium-term growth.

ICICI Securities expects TCS to report 0.3% quarter-on-quarter constant currency (CC) revenue growth in Q1FY27. With the company announcing nine large deals during the quarter, including a mega deal with SKF for a global AI-led business transformation, the brokerage expects healthy deal bookings of $9–11 billion. On the EBIT margin front, ICICI Securities expects a sequential contraction of 150 basis points, led by a three-month impact of the annual wage hike, investments in AI, and higher sales and marketing expenses. These pressures are likely to be partly offset by favourable currency movements.

Sectorial outlook of Q1FY27

Following Accenture management's earnings call that client budgets are not increasing and that much of the AI spending is currently concentrated in cybersecurity, analysts see Indian IT large-caps to continue lagging mid-cap IT companies in terms of growth.

Nomura analysts, Abhishek Bhandari and Karan Nain, in a note dated July 1 said that while the long-term target for Indian IT market would expand (and not contract), the near-term growth is likely to remain anaemic. On Q1FY27F earnings, “We expect the upcoming earnings season to be somber with weak quarterly growth trends from most of the large caps (weakest at -1.3% q-q from Wipro and the strongest at +1% for TechM . We expect mid-caps in general to continue posting stronger growth vs large caps. We do not expect any changes to the annual guidance from Infosys and HCL Tech, and expect Wipro to guide -1% to +1% revenue growth in 2Q FY27E,” the analysts said .

In its sectorial preview, Motilal Oswal Financial Services expects demand commentary to stay soft in Q1FY27, with macro, AI, and geopolitical overhangs continue to weigh on discretionary spendings and decision-making cycles of IT sector clients, and the upper end of revenue guidance band from companies being pulled back. “We expect Infosys to lower the upper end of its FY27 guidance by 50bp, while HCL Tech could trim the upper end of its services growth guidance by 100bp,” the firm said in its sectorial preview report. Particularly on Q1FY27 results, the firm expects growth for large-caps firms to be in the range of -1.5% to 2.0%, while mid-caps are expected to outperform with growth ranging from -1.0% to 4.8%, led by continued large deal ramp-ups.

ICICI Securities, on the other hand, has turned its stance from neutral to negative on the IT sector, particularly large-cap IT companies, from its earlier neutral stance, citing the likelihood of prolonged low- to mid-single-digit revenue growth over FY24–FY28E and increasing downside risks. The brokerage sees AI-led deflation in support and maintenance work, a shift towards outcome-based billing, and workforce remodelling as key risk factors for large-cap IT companies. “We see the growth gap between large and mid-sized players widening; whereas, the margin gap is narrowing, with larger peers experiencing a thinning of margins,” the firm said in its sectorial preview note.