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Large information technology (IT) services companies are likely to have a soft second quarter, while select mid-cap firms may perform better than their larger peers, according to a report by Emkay.
The report said the overall macroeconomic environment remains largely unchanged, with limited signs of improvement or deterioration. Clients continue to remain cautious about technology spending due to economic uncertainty, keeping discretionary spending under pressure. Discretionary spending remains restrained, with clients adopting a cautious spending approach amid macro uncertainty, the report said. The IT services sector is also seeing changes in commercial arrangements, as clients increasingly focus on artificial intelligence (AI)-led efficiency, vendor consolidation and cost reduction, according to the report. Commercial constructs continue to reset as clients increasingly underwrite AI-led efficiency into renewals, vendor consolidation, and cost-takeout deals, it said. Emkay expects cross-currency movements to have a limited impact on reported US dollar revenue growth in the second quarter. For Tier-1 IT companies, constant currency revenue growth is expected to range between -1.0 per cent and 3.1 per cent. For Tier-2 companies, growth is expected to be between 0.5 per cent and 8.0 per cent. The report said cross-currency headwinds could reduce reported US dollar revenue growth of Tier-1 companies by 10-20 basis points. Select mid-cap IT companies are expected to continue outperforming large-cap firms, the report said. The NIFTY IT Index has underperformed the broader market by 5.6 per cent over the past one month and 6.5 per cent over the past six months. The underperformance has come amid concerns over slower growth, weak discretionary demand and the impact of AI on traditional IT services. These concerns are partly offset by the depreciation of the Indian rupee, according to the report. Investors will closely watch management commentary on FY27 revenue and margin guidance, client furloughs, recovery in discretionary spending and the impact of AI on IT services. The report said investors will also assess whether spending on AI is creating new technology budgets or simply shifting existing IT spending towards AI-related projects. Changes in pricing and commercial models, hiring plans and the skills required by IT companies will also remain key areas to watch, it added. The ability and willingness of enterprises to adopt and deploy AI-based solutions across different business functions will also play an important role in shaping the IT services sector, according to the report. Overall, Emkay expects the near-term environment to remain challenging for large IT companies, while select mid-cap firms could see relatively stronger growth. (ANI)
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