What Lies Ahead for India's IT Giants? Insights on Revenue Growth and AI Impact

Muted Growth Forecast for India's IT Sector

New Delhi: Major IT firms in India are anticipated to show limited revenue growth and stable margins for the July-September quarter, as clients tighten discretionary budgets. Analysts are particularly focused on the speed at which strong bookings convert into revenue and the extent to which AI is impacting traditional services.

According to research advisory UnearthInsight, the top five IT companies are projected to experience a quarter-on-quarter growth of only 0.5-1% in the second quarter of FY27, showing little change from the previous quarter.

Gaurav Vasu, Founder and CEO of UnearthInsight, stated, "Q2 is unlikely to outperform Q1... as we are not witnessing any revival in client budgets or spending. Discretionary spending remains stagnant due to geopolitical tensions, and decision-making processes are prolonged."

Gartner describes this quarter as "somewhat stronger" than the last, primarily due to previously awarded contracts entering revenue-generating phases.

However, they noted that market conditions remain largely unchanged, with cautious discretionary spending and a continued emphasis on productivity outcomes shaping purchasing decisions.

Gartner's Senior Principal Analyst, Biswajit Maity, indicated that growth among leading IT service providers is expected to remain modest based on current market trends.

Vasu mentioned that while bookings are expected to remain robust, the conversion to revenue will take longer, with decision cycles anticipated to extend over the next 12-18 months.

The earnings season for Q2 kicks off with Tata Consultancy Services (TCS) on October 8, followed by HCLTech on October 12 and Infosys on October 23.

Vasu does not foresee significant changes to FY27 guidance, although some companies may slightly raise their upper estimates by about 0.5%.

UnearthInsight maintains its full-year growth forecast for top firms at 3-4%, attributing much of this growth to inorganic means rather than an uptick in demand. The tech services sector has already invested USD 3.6 billion across 14 M&A deals in FY27.

Vasu also pointed out that margins will continue to face pressure. Recent wage hikes have just been absorbed, and investments in AI platforms and partnerships must now be integrated into deals to secure them. Efficiency gains from AI are also being passed back to clients.

"The real margin cushion will come from selling applications and platforms rather than just services," he added. UnearthInsight anticipates slight margin improvements for select tier-one players like TCS, Infosys, and HCLTech, while mid-tier firms are expected to maintain their current margins as they absorb M&A integration costs.

Gartner predicts that margins will remain relatively stable, with limited opportunities for expansion. They noted that productivity gains from automation and improved utilization are being counterbalanced by AI investments, wage inflation for in-demand skills, and client requests for pricing concessions.

Maity emphasized that client technology spending remains cautious, with organizations prioritizing initiatives that yield measurable business outcomes, cost optimization, and risk mitigation.

"Most organizations are selective in their investment choices, concentrating on projects with clear ROI, productivity enhancements, and operational resilience. Demand is still driven by AI, cybersecurity, and modernization initiatives, while discretionary transformation programs are subject to stricter budget oversight and longer approval processes. Consequently, spending is gradually improving, but the overall demand landscape remains disciplined rather than fully recovered," he explained.

Vasu noted that the banking sector is under stress, while retail and manufacturing face challenges due to persistent inflation. He described the US market as the weakest, while Europe is expected to grow due to cost-optimization deals, and the Asia Pacific region is projected to grow faster. Conversely, the Middle East is anticipated to slow significantly due to ongoing conflicts.

Gartner identifies the strongest demand coming from BFSI, healthcare, manufacturing, and telecommunications, while retail and oil and gas sectors are comparatively weaker. They assert that the US remains the strongest market, bolstered by investments in AI, cloud, and digital transformation, with Europe showing resilience due to regulatory, security, and sovereignty-related spending.

Regarding AI's impact on revenue, Vasu noted that AI-driven revenue constitutes less than 5% of the industry's total. He mentioned that a growing portion of client budgets in the US and Europe is being allocated to native AI platforms and startups. Additionally, software vendors like SAP and Oracle are increasingly offering AI-embedded products, reducing the reliance on traditional services.

Gartner indicated that generative and agentic AI are beginning to significantly diminish the demand for labor-based services, particularly in managed services and service desk roles. They estimate that by 2030, up to 50% of traditional managed-services opportunities may become challenging for existing providers to secure.

Companies have started to disclose their AI revenue. In the June quarter, Infosys reported that AI-related revenue accounted for 8.2% of its total revenue, while TCS announced an annualized AI revenue of USD 2.6 billion.

Vasu stated that mid-tier firms are likely to continue outperforming their larger counterparts, although their growth will also decelerate. He noted that acquisitions by companies like Coforge and Persistent could impact growth.

UnearthInsight anticipates a slight recovery in FY28, projecting growth of around 6%.