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Indias large IT companies are expected to report another muted quarter in Q2FY27 as AI-led deflation and weak demand weigh on growth, while mid-tier firms are likely to outperform on market-share gains and stronger execution, according to a report by Kotak Institutional Equities.
AI investments remain at an early stage for most companies, with enterprises largely focused on using the technology to cut costs and improve productivity rather than generate new revenue. Additionally, the growing adoption of open-source and open-weight AI models could intensify pricing pressure for IT services companies, the report said. While these models could create incremental opportunities for service providers, Kotak expects gross deflation of ~7% and net deflation of 3.5% for companies. Kotak further stressed, AI-led deflation is now becoming visible in the base business, while challengers are offsetting some of the pressure through market-share gains and stronger execution. Incumbents, meanwhile, are largely focused on defending their existing revenues. We expect muted growth for tier 1 IT companies in a seasonally strong quarter. AI deflation and, to a lesser extent, weaker macro will contribute to weak growth, it said adding, Mid-tiers will outperform once again, it said. Regarding profitability, Kotak expects margins for large IT companies to remain broadly stable or decline marginally on a year-on-year basis, depending partly on the timing of wage revisions across companies. Marginssteady for now, pressure points building Margins depend on wage revision cycles, which have been inconsistent across companies. However, for all large companies, it expects a marginal decline to stable margins on yoy comparison. According to Kotak, rupee depreciation has so far helped offset some of the pricing pressure and supported margins. The rupee depreciated 0.8 per cent quarter-on-quarter and 8.4 per cent year-on-year during the quarter. We expect stable to improving margins for mid-tier companies, it said, adding, The translation of rupee depreciation into net profit may not be immediate for many companies due to cash-flow hedging. Apart from IT firms, engineering research and development (ERD) companies are expected to report lacklustre growth, the report noted. (ANI)
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