Indian IT Firms Brace for Muted Q1 as AI Shift and Weak Demand Dampen Growth Expectations

Indian IT firms face muted Q1 as AI shift, weak demand weigh

BENGALURU, July 6 (Reuters) - India's top information technology companies are expected to report another subdued quarter, as AI-driven pricing pressure, weak client spending, and global geopolitical turmoil continue to weigh on growth, nine brokerages said. The April-to-June quarter is usually a strong one for India's $315 billion IT sector, helped by higher billing days and new project starts, but analysts expect a slow start to the fiscal year that would push back hopes of a recovery. India's ⁠largest IT services company, Tata Consultancy Services (TCS.NS), opens new tab, kicks off earnings on Thursday with peers Infosys (INFY.NS), opens new tab, HCLTech (HCLT.NS), opens new tab and Wipro (WIPR.NS), opens new tab reporting later this month. While India's top six IT firms are expected to report around 14% year-on-year revenue growth in rupee terms with net profit rising 12%-13%, this would largely be due to the impact of sharp rupee depreciation. Stripping out exchange rate effects, the companies are expected to post a mere 2.8% revenue growth in constant-currency terms. Citi expects a fourth straight year of subdued growth for Indian IT firms, while JPMorgan sees revenue growth staying below 3%-4% for the "foreseeable future". The IT sector is racing to adapt to changing customer needs as companies across the globe step up the use of AI tools and ⁠agents to cut costs and quicken software development cycles. Software firms have slowed hiring, with TCS Chairman N Chandrasekaran saying the "day is not far" when the company would have an equal number of AI agents and employees. Indian IT firms are in a "perfect storm," Nomura said in its earnings preview, with Middle East conflict-led uncertainty compounding AI-driven pricing pressure. Fears that AI would disrupt the IT sector's traditional, labour-intensive ⁠business model dragged the Nifty IT index (.NIFTYIT), opens new tab down 9.5% in the June quarter even as India's benchmark Nifty 50 (.NSEI), opens new tab gained 6.9%. The IT index has slumped about 28% so far in 2026, making it the worst-performing major sector in India. The impact of AI-led disruption and ⁠weakness in client spending will be broad-based, according to PL Capital, with effects visible in the consumer, hi-tech, and telecom verticals. "Slower decision-making and elongated sales cycle are leading to delays in revenue conversion and execution," the brokerage said in a ⁠note. Annual revenue forecasts will be a key focus for investors. Brokerages say Infosys and HCLTech could narrow or trim the upper end of their forecasts. Potentially higher interest rates in the U.S., which makes up about 60% of Indian IT firms' revenue, also loom. Reporting by Haripriya Suresh and Bharath Rajeswaran in Bengaluru; Editing by Mrigank Dhaniwala Our Standards: The Thomson Reuters Trust Principles., opens new tab * Suggested Topics: * India Haripriya Suresh Thomson Reuters Haripriya reports on India's $254-billion Indian information technology (IT) industry, the country's burgeoning GCCs, as well as new-age startups. With seven years of experience, she has previously reported on politics, civic issues, crime, and breaking news in south India, and tracked the country's gig economy. She has a degree in Media Studies with a specialisation in journalism from the Symbiosis Centre for Media and Communication.

Strong Order Book, Mega Deals Fuel TCS Optimism

Macroeconomic uncertainties due to the West Asia conflict have led to project deferrals in key verticals at Tata Consultancy Services, which reported flat sequential growth and a 13.9% rise on year in rupee terms. India's largest software services firm expects the second quarter to be better with some stressed sectors returning to positivity and a growing AI deal pipeline of $2.6 billion, chief executive K Krithivasan and chief operating officer Aarthi Subramanian told Himanshi Lohchab in an interview. Edited excerpts: Q1 results have been a mixed bag. How do you read the macroeconomic situation and expect 2026 to pan out? Krithivasan: The macroeconomic conditions that we spoke about around March last year have continued. In fact, the West Asia crisis, which we had hoped would ease, is still ongoing. Against that backdrop, some industries have performed well while others continue to remain under pressure. Banking and financial services, technology services have done well. However, sectors such as consumer business, life sciences and automobiles continue to face stress. Across geographies, our emerging markets are doing well. India is doing well, and even the UK has performed well. So, it is a mixed picture. What we are happy about is our overall growth, the strength of our order book, the mega deals we have signed, and the quality of AI conversations we are having with customers. Those discussions continue to be encouraging. Are you seeing project deferrals? Are companies becoming more cautious because of the uncertainty? Krithivasan: There are some deferrals. As I mentioned earlier, you see them more in industries that are under greater stress. At the same time, there are also new project starts where customers believe there is a clear RoI, either from a technology modernisation perspective or a business outcome perspective. So, while projects continue to start, deferrals are naturally higher in the stressed verticals. You also mentioned that you expect Q2 to be better. What gives you that confidence? Krithivasan: The industries that have performed well are expected to continue performing well. In addition, we expect sectors such as manufacturing and life sciences to turn positive. With more industries improving in Q2, we believe the overall quarter should be better than Q1. The deals we have signed will also begin ramping up and moving into delivery, which should support growth. AI revenues have continued to grow, but incremental revenue expansion has slowed. You also said the industry is still trying to understand the nature of this new business. Subramanian: First, there is no common industry definition of AI revenue. Different companies define it differently. We have taken a very narrow and specific definition of what constitutes AI revenue. The $2.6 billion AI revenue refers specifically to pure-play AI transformation projects. It's a new area. Enterprises completed a large number of pilots during 2024 and 2025. Last year, we saw meaningful good scaling of projects and that has continued. Because AI is still a relatively new technology, enterprises are validating the business value, building internal confidence and putting the right architectural controls in place before deploying it at scale. These projects are typically four, six, nine-month engagements because customers are still evaluating the value they can derive from the technology. They are not traditional multi-year contracts. However, we are beginning to see a shift this year. The size of AI projects is increasing because customer confidence in the technology is growing. Are enterprises also becoming more cautious because of concerns over AI such as sovereignty, governance and RoI not translating into full-scale production? Subramanian: No. We are meeting a large number of CEOs and CXOs. People genuinely believe this is a very promising technology that can create significant value. Different enterprises are at different stages of adoption. Those that started early are now willing to make larger investments, while others are still at an earlier stage. So there is a spectrum of adoption, but the belief in the technology cuts across industries. Headcount addition this quarter has been among the highest in the last 15 quarters. What drove this increase? Is TCS restructuring by reducing the mid-to-senior layers while hiring more freshers? Krithivasan: I would not frame this as replacing mid-to-senior employees with freshers. It is really about building the right talent pool. We constantly evaluate where we need to hire people with the capabilities our customers are looking for. At the same time, we calibrate hiring based on the demand we see. Several employees have said their take-home salaries have fallen after implementation of the new labour code. Krithivasan: I'm not aware of the specific cases you are referring to. Our HR team has worked very hard to ensure that nobody's take-home pay is adversely impacted. TCS announced partnerships with Anthropic and Mistral this quarter. What do these partnerships mean for TCS? Are you seeking access to Anthropic's top-tier models such as Mythos and Fable? Subramanian: Last quarter, we announced our OpenAI partnership. This quarter, we announced partnerships with Anthropic and Mistral. The contours of all these partnerships are broadly similar. The first objective is to gain access to their products so that we can build skills and competencies through our Centres of Excellence. New products are constantly being launched, and we need to build capabilities that help us design and deliver solutions for our customers. The second area is industry-specific solutions. The third area is joint go-to-market opportunities. Regarding Mythos, as you know, it has only been available to a limited set of companies. We are currently in discussions with Anthropic regarding access. ON AI REVENUES The $2.6 billion AI revenue refers specifically to pure-play AI transformation projects. It's anew area. ON LABOUR CODE Our HR team has worked hard to ensure nobody's takehome pay is adversely impacted

TCS' next growth phase hinges on AI investments, not just deal momentum

Tata Consultancy Services reported flat dollar revenue and margin contraction in the June quarter. AI revenue shows growth but remains a small part of total earnings. The company paid significant dividends, impacting its ability to invest internally. Sustained order flow and stable attrition offer some long-term hope. TCS needs to balance investor returns with future technology investments. ET Intelligence Group: The performance of Tata Consultancy Services (TCS) in the June 2026 quarter was on expected lines with sequentially flat dollar revenue, margin contraction and sustained order flow. Amid top line deceleration, the country's largest software exporter has been reporting traction in new contracts involving solutions based on artificial intelligence (AI) platforms. However, AI revenue currently forms only a small portion of the total revenue. To improve client engagement in a fast-evolving technology landscape, it needs to scale up rapidly thereby requiring higher capital investments. If this has to happen without burdening the balance sheet, it requires a relook at the current policy of returning cash to investors. New Math Scaling investments could require a rethink of the IT major's generous dividend policy TCS reported a double-digit sequential growth of 13.6% in annualised AI revenue, even though annualised total revenue in the June quarter failed to increase. To be sure, at $2.6 billion, AI revenue accounts for just about 8.5% of total annualised revenue of $30.5 billion, implying that it has a long way to go before AI initiatives start contributing meaningfully without affecting overall operating margins. This may require greater investments in AI capabilities and partnerships. In this backdrop, the company needs to revisit its liberal dividend policy. It paid ₹39,571 crore in dividends in FY26 while generating an estimated ₹47,288 crore in free cash flow (FCF), which is operating cash flow net of capital expenditure. In the previous three years, dividends ranged between ₹44,962 crore and ₹46,223 crore, while FCF was between ₹41,440 crore and ₹46,449 crore. This shows that it has been returning the majority of free cash to shareholders. While it may be a suitable option for a mature business such as consumer goods, a company such as TCS that caters to client requirements shaped by tectonic shifts in technology will need to divert internal accruals to invest for future growth. The dividend yield at present is over five considering the FY26 dividend, buoyed by a sharp 36% fall in the TCS stock price in 2026 so far. Historically, it has remained under three. For the June quarter, the company has declared an interim dividend of ₹12. Amid slower revenue growth, continued momentum in fresh orders may offer some solace. TCS clocked $9.5 billion in total contract value orders bagged during the June quarter, in line with the $9-10 billion range seen during the past few quarters. Its employee attrition rate remained stable sequentially at 13.6%. Its headcount expanded sequentially for the second straight quarter, this time by 9,279 to 5.9 lakh. These factors offer hope for long term growth amid short-term uncertainty.

TCS braces for muted June quarter; AI outlook and deal pipeline in focus

Tata Consultancy Services anticipates slower revenue and profit growth for June 2026 quarter. Client decision cycles are elongating, impacting project ramp-ups and growth rates. Revenue is expected to remain flat sequentially, marking a continued trend. A weaker rupee may offer some support to rupee-denominated financials. Investors will monitor artificial intelligence initiatives and deal scalability trends. ET Intelligence Group: Tata Consultancy Services (TCS) is expected to report deceleration in revenue and profit growth for the June 2026 quarter amid delays in project ramp-ups as decision cycles of clients elongate. According to the average of the estimates by ETIG and six brokerages, the top line is likely to remain flat sequentially at around $7,620 million for the country's largest software exporter, making it the seventh consecutive quarter of under 2% growth. Revenue had grown by 1.5% in the previous quarter. The company will declare financial numbers on Thursday after market hours. "We forecast flattish revenue for the quarter, reflecting macro headwinds, productivity pass-through in renewed mega-deals and rising AI-led cost reduction expectations from clients," said Kotak Securities in a preview report. "Volatile macro conditions are likely to keep clients cautious regarding spending on discretionary new initiatives, which are required for meaningful scale up on AI adoption and producing required return on investment," mentioned Equirus Securities in a sector preview report. Slow Lane Revenue may remain flat QoQ, marking the 7th straight quarter of sub 2% growth The broking firm expects top IT companies to report either a 1.7% decline or 1.1% increase on a sequential basis in the June quarter. The rupee denominated financials may find some respite due to favourable rupee-dollar movement. The average rupee rate was 3.4% lower sequentially in the June quarter. A weaker home currency improves realisations of exporters, which comes in handy at a time when the revenue growth is muted. In rupee terms, revenue of TCS may grow by 2.1% to ₹72,202 crore while net profit may drop by 1.9% to ₹13,454 crore. "The translation of rupee depreciation into net profit may not be immediate for many companies due to cash-flow hedging," said Kotak Securities. TCS is expected to report a 140-160 basis point sequential drop in the operating margin (EBIT margin) following salary revisions. It had clocked a margin of 25.3% in the previous quarter. Despite slower decision making by clients, the company is likely to report $8-10 billion worth of new contracts, in line with the trend over the past few quarters. In the March 2026 quarter, it had clocked $12 billion worth of orders. Investors will track the company's initiatives in artificial intelligence (AI) and the trend in project ramp-ups. "Commentary on demand environment, integration synergies, AI revenue traction, and deal scalability will be closely watched," stated Motilal Oswal Financial Services in a report. The broker expects the company's AI-led services momentum and recent acquisitions of Coastal Cloud and ListEngage to support medium-term growth.

TCS, Infosys and other Indian IT stocks rise up to 4% after AI worries trigger Kospi selloff

Indian IT stocks climbed despite a sharp sell-off in Asian chipmakers, as investors positioned for Q1 earnings. Indian IT stocks have had a rough ride in recent months because investors worry that AI could hurt billing growth, reduce manpower-linked revenue and force companies to pass productivity benefits to clients. With the sector having lost over Rs 17 lakh crore in market value, upcoming earnings and management commentary could determine whether the recovery has legs. Indian IT stocks gained on Tuesday, with Infosys, TCS, Tech Mahindra and Mphasis rising up to 4%, even as Asian technology shares came under pressure after a sharp selloff in South Korea's chipmakers. Infosys rose nearly 4%, while TCS gained 3%. Tech Mahindra was up 3.4%, and Mphasis advanced 3%. Wipro, however, slipped 0.4%, staying weak even as the broader IT pack recovered. The move came at a time when investors are preparing for the June-quarter earnings season of Indian IT companies. The sector has been under heavy pressure for months due to weak discretionary technology spending, slower client decision-making, pressure from artificial intelligence-led productivity gains and valuation concerns. The rebound in Indian IT stocks stood in contrast to the fall in South Korea, where AI-linked chip stocks dragged the market lower. The benchmark KOSPI closed down 395.02 points, or 4.9%, at 7,656.31, after falling as much as 8.2% earlier in the session. The index is now down 16% from its June 22 record close of 9,114.55, though it remains up 82% so far this year. Circuit breakers were triggered on the KOSPI during the session, the sixth such instance this year, as volatility in semiconductor stocks remained high. Samsung Electronics and SK Hynix led the decline, ending down 6.9% and 6.1%, respectively, after both fell more than 10% intraday. Also Read: The Q1 verdict: Can TCS, Infosys, other IT results stop a Rs 17 lakh crore AI-led rout? Samsung fell even after forecasting a 19-fold jump in second-quarter operating profit. The fall showed that investors are now questioning whether strong AI-linked earnings are already priced into chip stocks after a sharp rally. For Indian IT investors, the concern is different but linked to the same AI theme. While Korean chipmakers have rallied on AI demand, Indian IT stocks have fallen because investors worry that AI could hurt billing growth, reduce manpower-linked revenue and force companies to pass productivity benefits to clients. The correction has been severe. TCS, Infosys, Wipro and LTIMindtree are now down at least 50% from their all-time highs. Across 10 major IT companies, the combined market-cap loss from peak levels is estimated at more than Rs 17 lakh crore. TCS has seen the biggest destruction in value. The stock has fallen about 56% from its all-time high of Rs 4,592.25 in August 2024 to around Rs 2,033. Its market cap has dropped from Rs 16.48 lakh crore to Rs 7.36 lakh crore, wiping out more than Rs 9.12 lakh crore. Infosys has nearly halved from its peak of Rs 2,006.45 in December 2024 to Rs 1,006. Its market value has fallen from Rs 8.30 lakh crore to Rs 4.08 lakh crore. Wipro is down 54% from its peak, while LTIMindtree has lost more than 53%. HCL Tech, Persistent Systems, Mphasis and Tech Mahindra have also seen sharp declines. The latest rise in IT shares may partly reflect bargain buying after the steep fall. But the real test will come with Q1 results and management commentary. Morgan Stanley expects a muted first quarter for IT companies and subdued commentary for the second quarter. The brokerage sees risks to FY27 revenue guidance ranges and has lowered estimates for large-cap IT companies. It has also downgraded TCS to equal-weight, saying the stock's premium to Accenture has risen above 40%, putting valuations for the broader group at risk. Morgan Stanley expects organic revenue growth for most large-cap IT firms to drift towards 1.5-3.5%, except Wipro, where it sees a decline. Investors will now watch whether companies such as TCS and Infosys can show signs of demand stability, defend margins and explain how AI will support revenue rather than only reduce costs for clients.\ (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

The Q1 verdict: Can TCS, Infosys, other IT results stop a Rs 17 lakh crore AI-led rout?

India's top IT firms like TCS and Infosys face a crucial earnings season after a massive Rs 17 lakh crore market value erosion. Analysts anticipate muted results and weak future guidance, citing client spending slowdowns, pricing pressures, and the disruptive impact of AI. Investors are keenly watching if current valuations reflect the anticipated slower growth cycle. India's IT stocks enter the June-quarter earnings season with little room for disappointment. The sector has already suffered one of its sharpest corrections in years. TCS, Infosys, Wipro and LTIMindtree are now down at least 50% from their all-time highs, while the broader pack has seen a steep erosion in market value. Across 10 major IT companies, the combined market-cap loss from peak levels is estimated at more than Rs 17 lakh crore. TCS has seen the biggest destruction in absolute value. The stock has fallen about 56% from its all-time high of Rs 4,592.25 in August 2024 to Rs 2,033. Its market cap has dropped from Rs 16.48 lakh crore to Rs 7.36 lakh crore, wiping out more than Rs 9.12 lakh crore. Meanwhile, Infosys has nearly halved from its peak of Rs 2,006.45 in December 2024 to Rs 1,006, while its market value has fallen to Rs 4.08 lakh crore from Rs 8.30 lakh crore. Wipro is down 54% from its peak, while LTIMindtree has lost more than 53%. HCL Tech, Persistent Systems, Mphasis and Tech Mahindra have also seen sharp declines. This makes the upcoming earnings season important, but brokerages are not expecting a quick recovery. Why are there muted expectations?Morgan Stanley says IT companies are likely to see a muted first quarter and subdued commentary for the second quarter. It sees risks to FY27 revenue guidance ranges and has lowered estimates for large-cap IT companies. The brokerage has also downgraded TCS to equal-weight, saying the stock's premium to Accenture has risen above 40%, putting the group's valuations at risk. It expects organic revenue growth for most large-cap IT firms to drift towards 1.5-3.5%, except Wipro, where it sees a decline. The pressure is not just from weak discretionary spending. The sector is also dealing with slower decision-making by clients, pricing pressure on contract renewals and rising investments in artificial intelligence services. These factors are likely to keep growth weak even in a quarter that is usually seasonally stronger. Also Read: Reliance market value now equals India's top five IT companies combined Kotak Equities expects June-quarter revenue growth of -1% to +1% for large IT companies. It expects HCL Tech's services business to decline 1%, Wipro to fall 1.1%, TCS to report flat revenue and Infosys to post only 1% organic growth quarter-on-quarter. Tech Mahindra may do slightly better, with 1% sequential growth. Kotak said the West Asia crisis and AI-led deflation are starting to affect growth. AI risks and moreAI has become the biggest debate around the sector. Until recently, artificial intelligence was seen as a new opportunity for Indian IT firms. Now, investors are worried that it may first hurt revenue by forcing companies to pass productivity gains back to clients. Kotak has moved its GenAI deflation assumption to the upper end of the 3-3.5% range and cut fair values by up to 21%. Nomura framed the issue more directly, asking whether quarterly earnings matter as much anymore when investors are focused on AI and macro risks. The brokerage said the Nifty IT index has underperformed the broader Indian market by 20% since January 1 this year, mainly because of P/E derating linked to AI obsolescence fears. It still believes the long-term market for Indian IT will expand, but near-term growth is likely to remain weak. Also Read: Investors looking for shelter from AI storm are turning to India Short-term takeThe near-term view is similar across most brokerages. Motilal Oswal expects demand commentary to remain soft as macro uncertainty, AI and geopolitical concerns weigh on discretionary spending. It sees constant-currency growth for large-cap IT companies in a range of -1.5% to 2%. It expects the soft start to extend into the second quarter as well. The brokerage said the top end of FY27 guidance may become difficult to defend if the first half remains below the required run rate. Margins may offer some support, but not enough to change the broader story. A weaker rupee has helped cushion margin pressure for some companies. Kotak noted that the rupee depreciated 2.6% quarter-on-quarter and 9.7% year-on-year, helping offset pricing pressure. But wage hikes, weak operating leverage, AI investments, restructuring costs and hedging losses could weigh on profitability. Systematix expects margins for large IT services companies to decline by 10-100 basis points quarter-on-quarter, excluding Tech Mahindra. All eyes on guidanceInfosys may either narrow or slightly revise its FY27 growth band, depending on the brokerage view. Morgan Stanley expects it to tighten guidance to 2-3.5%, including 1 percentage point from inorganic activity. Kotak expects a revision to 2-3.5% from 1.5-3.5%, while Nuvama expects an upgrade to 2.5-4%, including acquisition contribution. HCL Tech is largely expected to retain guidance, though several analysts believe growth may land below the midpoint. Wipro is expected to guide for weak second-quarter growth, with estimates ranging from -2% to +1%. One clear theme is the growing gap between large-caps and mid-tier IT companies. Most brokerages expect mid-caps to keep outperforming. Morgan Stanley prefers Mphasis and Coforge over engineering R&D plays. Kotak favours Coforge, Hexaware and Indegene among challengers. Nuvama expects Tier-2 companies to outpace Tier-1 firms, helped by stronger deal ramp-ups and select pockets of demand. The June-quarter numbers may not rev up sentiment by themselves. But they will show whether the Rs 15 lakh crore crash has already priced in the pain, or whether investors still need to adjust to a slower, more uncertain IT cycle. (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)