IT sector Q1 preview: AI, macro uncertainty and weak discretionary spending to weigh on earnings

India's top IT services companies are expected to report muted earnings in June quarter of FY27, as weak discretionary spending, prolonged client decision-making and growing AI-led cost optimisation continue to weigh on revenue growth, according to Emkay Global Financial Services.

The brokerage expects the country's five largest IT companies – TCS, Infosys, HCLTech, Wipro and Tech Mahindra - to post mixed earnings for the June quarter, with margins likely to be benefiting from a weaker rupee even as revenue growth remains under pressure.

"The IT services sector is likely to commence FY27 on a subdued note, owing to weak discretionary spending, slower decision-making amid persistent macro and geopolitical uncertainties, and rising client expectations for AI-led efficiency gains," Emkay said in its Q1FY27 earnings preview.

Emkay said the nearly 5% depreciation in the rupee over the past six months is expected to provide a near-term cushion to earnings, partially offsetting weak demand. However, margin performance across companies is likely to remain mixed due to wage hikes, large-deal ramp-up costs, seasonal factors and acquisition-related expenses.

The brokerage noted that the evolving AI-led technology landscape is also delaying enterprise spending decisions, as clients reassess technology budgets and investment priorities. At the same time, AI-driven productivity gains, vendor consolidation and changing deal structures are creating additional challenges for traditional IT services providers.

Among these large-cap IT companies, Infosys and Tech Mahindra are expected to outperform peers in sequential revenue growth, while Tata Consultancy Services (TCS) , HCLTech and Wipro are likely to report softer trends.

TCS likely to see margin pressure due to wage hike

IT bellwether TCS, the country’s largest software exporter, is set to release its first quarter results on July 9. The most valued IT company is expected to post 0.2% sequential growth in dollar revenue after factoring in a 30-basis-point cross-currency headwind.

Revenue is estimated at ₹72,392 crore for the quarter, up 14.1% year-on-year and 2.4% sequentially. However, EBIT margin is expected to decline 90 basis points quarter-on-quarter to 26.5%, primarily due to the impact of annual wage hikes.

The brokerage said that the management commentary on discretionary spending recovery, deal wins, AI-related opportunities, pricing trends, BSNL contract execution, and the company's hiring strategy will be keenly watched.

Infosys may lead growth among large peers

Infosys is expected to deliver the strongest quarter among tier-1 peers, aided by acquisitions. Emkay expects the company to report 2.1% sequential dollar revenue growth, supported by a 110-basis-point contribution from the Stratus and Optimum acquisitions, partly offset by cross-currency headwinds.

Revenue is estimated at ₹48,791 crore, representing growth of 15.4% year-on-year and 5.1% sequentially. EBIT margin is expected to improve marginally by 10 basis points.

The brokerage expects Infosys to raise its FY27 constant currency revenue growth guidance to 2-4%, from the earlier 1.5-3.5%, reflecting contributions from recent acquisitions, while retaining its EBIT margin guidance of 20-22%.

HCLTech may report sequential revenue decline

HCLTech is expected to report a 1% sequential decline in dollar revenue, impacted by productivity benefit pass-through, seasonality and weakness in two large client accounts.

Despite softer revenue, operating margin is likely to expand by 60 basis points sequentially to 20.5% due to normalisation of restructuring costs.

Revenue is projected at ₹34,550 crore, up 13.8% year-on-year and 1.7% sequentially. Investors will focus on the company's FY27 guidance, software and ER&D business outlook, AI monetisation strategy and recent acquisitions.

Wipro guidance in focus

Wipro is expected to report a 1.4% sequential decline in IT services dollar revenue despite contributions from the Olam deal.

Revenue is estimated at ₹24,892 crore, while IT services EBIT margin is likely to contract by around 70 basis points because of wage hikes, weak revenue growth, integration of acquired businesses and investments in its Wipro Intelligence platform.

Emkay expects Wipro to guide for sequential revenue growth of between -1% and 1% for the September quarter.

Tech Mahindra likely to sustain momentum

Tech Mahindra is expected to emerge as another relative outperformer among tier-1 companies, with 1.1% sequential dollar revenue growth.

Revenue is projected at ₹15,566 crore, up 16.6% year-on-year and 3.2% sequentially, while EBIT margin is expected to improve 50 basis points to 17.5%.

Investors will monitor the company's outlook on enterprise spending, telecom demand, large deal execution and AI-driven opportunities.

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