Indian IT’s Q2 earnings dilemma deepens: More deals but weaker growth and falling pricing power

India’s IT sector enters its Q2 earnings season this week facing a contradiction. Deal activity remains healthy, but revenue growth is weakening as clients demand a larger share of the productivity gains created by artificial intelligence (AI).

The pressure is already visible in the market. The Nifty IT index has nosedived about 39% from its record high of 46,088.90 reached in December 2024, as investors have grappled with slowing earnings and fears that AI could annihilate demand for traditional IT services.

Brokerages expect the September quarter to reinforce those concerns. Large IT companies could deliver their weakest Q2 growth in three years, according to Jefferies, while aggregate growth across the sector is likely to be driven increasingly by acquisitions rather than organic expansion.


Jefferies expects aggregate revenue growth of 1.7% sequentially in constant currency terms, but organic growth of just 0.8%. Large IT companies are expected to grow 0.5%, compared with 3.5% for mid-sized companies.

“The IT services pie is still growing, but the AI-adjusted pricing pool available to vendors is shrinking,” Kotak Institutional Equities said.

The brokerage said clients are embedding productivity concessions into contract renewals and capturing a larger share of AI-led savings. As a result, deal wins are increasingly protecting vendors’ relevance rather than guaranteeing growth.

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AI is becoming a pricing problem

The debate around AI in Indian IT has shifted from whether the technology will disrupt jobs to how quickly it will reduce the value of existing services.

Kotak expects gross deflation of about 7% and net deflation of 3.5% for companies as clients push for efficiency gains and lower pricing. AI-led revenue opportunities are growing, but remain insufficient to offset deflation in the existing business, it said.

Commercial structures are also being reset. Emkay Research said clients are increasingly underwriting AI-led efficiency into renewals, vendor consolidation programmes and cost takeout deals.

The impact is most visible in traditional technology services, where productivity gains can be directly converted into lower headcount requirements, shorter project timelines or reduced billing. Kotak said repricing is not a one time event across the sector, but a continuous process as code assistants and AI agents improve productivity.

The brokerage expects the pressure to be particularly high in application management services, where renewals are more frequent and clients can capture AI-led savings quickly.

Acquisitions are masking weak organic growth

The September quarter may produce a better headline revenue number than the underlying business warrants.

HCL Tech, Infosys, Coforge and Cyient are expected to receive support from recent acquisitions or large deal ramp-ups. But analysts caution that reported growth will increasingly need to be separated into organic and inorganic components.

Emkay expects HCL Tech, helped by acquisitions and deal ramp-up, to lead large-cap growth alongside Infosys and Tech Mahindra. Among mid-cap companies, Coforge is expected to benefit from Encora, while Persistent is likely to gain from the ramp-up of a $650 million mega deal.

Motilal Oswal expects large-cap companies to deliver constant currency growth ranging from a decline of 0.5% to growth of 3% sequentially. Mid-cap companies, by contrast, are expected to post growth ranging from zero to 12%.

That divergence has become one of the defining features of the sector. JM Financial expects mid-tier Indian IT companies to deliver double-digit organic revenue growth in FY27, while large-cap companies continue to work towards mid-single-digit growth.

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Infosys faces a guidance test

Infosys is emerging as the biggest guidance risk among large IT companies.

Emkay expects the company to lower its FY27 constant currency revenue growth guidance to 1.5%-2.5% from 1.5%-3%, reducing the midpoint by 25 basis points. Kotak also expects a cut to 1.5%-2.5%.

Jefferies has a more bearish view, expecting Infosys to reduce its FY27 revenue growth guidance by 100 basis points to 0.5%-2%.

HCL Tech is expected to be relatively more resilient because of stronger deal visibility. Brokerages expect the company to retain or narrow its guidance range, with acquisitions contributing to reported growth. Wipro, meanwhile, is expected to provide weak third-quarter guidance, with brokerages forecasting sequential growth ranging from a decline of 2% to flat growth.

The key question for investors is whether acquisitions and large deals can deliver enough revenue acceleration to offset weak discretionary spending and AI-led deflation.

Mid-caps retain the growth premium

The weaker large-cap outlook is strengthening the case for selected mid-cap IT companies, despite their richer valuations.

JM Financial said mid-tier companies trade at about a 75% premium to large-cap IT but expects that premium to sustain or widen because of better near-term earnings visibility.

Coforge is expected to lead mid-cap growth, supported by the Encora acquisition and deal execution. Persistent is expected to benefit from a large-deal ramp-up, while Mphasis, Hexaware and Sagility are also expected to outperform large-cap peers.

The brokerages’ preferred names include Coforge, Tech Mahindra, Sagility, Mphasis and Indegene. Motilal Oswal prefers HCLTech, Tech Mahindra and Coforge, while Emkay favours Persistent, Coforge, Hexaware, Sagility, Mphasis and LTTS among mid-caps.

However, the growth premium comes with a valuation risk. The sector’s mid-cap leaders will need to deliver sustained organic growth rather than rely only on acquisitions or individual contract wins.

Margins may improve, but the recovery remains fragile

Margins are expected to remain stable or improve for several companies, helped by rupee depreciation, wage hike reversals and cost controls.

Motilal Oswal expects TCS margins to improve by about 100 basis points sequentially and HCL Tech margins by roughly 120 basis points. Wipro and LTIMindtree may see smaller improvements, while Infosys and Tech Mahindra are expected to remain broadly stable.

But the margin improvement may not signal a recovery in demand. Kotak said currency has delayed the impact of pricing pressure, while Emkay flagged the risk of AI-led deflation, large-deal transition costs, pricing pressure and acquisitions.

The December quarter could bring another challenge. Kotak expects client furloughs to be similar to, or potentially higher than, usual levels as customers continue to face cost pressures.

For Indian IT companies, the immediate challenge is therefore not a lack of deals. It is converting those deals into profitable, organic growth before AI-driven productivity gains further erode pricing power.

(Disclaimer: This article has been written by Nikhil Agarwal, who is not a SEBI-registered Research Analyst or an Investment Adviser. Nikhil Agarwal and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here)