IT Sector Q2 FY27 Preview: Muted Revenue Growth Expected as Client Budgets Stay Tight

Gartner offers a slightly more optimistic view, noting that the quarter may be stronger than Q1 due to previously awarded contracts transitioning into revenue-generating phases. However, it agrees that market conditions remain broadly unchanged, with continued focus on productivity and cost optimisation influencing client purchasing decisions.

UnearthInsight's founder Gaurav Vasu highlighted that while bookings remain strong, their conversion into revenue is taking longer, with decision cycles expected to stay extended for the next 12-18 months. He does not anticipate major revisions to FY27 guidance, though a few companies might raise the top end of their growth outlook by around 0.5 per cent. The firm maintains its full-year growth estimate of 3-4 per cent for leading IT firms, attributing much of this to inorganic growth via mergers and acquisitions rather than a demand rebound.

Margin pressures are expected to persist, as wage hikes have only recently been absorbed and investments in AI platforms must now be factored into deals. UnearthInsight believes the real margin cushion will come from selling applications and platforms rather than traditional services. It expects slight margin improvements for tier-one players like TCS, Infosys and HCLTech, while mid-tier firms may sustain current levels as they absorb M&A integration costs.

Gartner echoes the view of broadly stable margins, with productivity gains from automation and better utilisation being offset by AI-related investments, wage inflation for in-demand skills, and client demands for pricing concessions. Both firms agree that client technology spending remains selective, focused on projects with clear ROI, cost optimisation, and operational resilience, particularly in AI, cybersecurity and modernisation.

On regional trends, Vasu described the US as the weakest market, cited pressures in banking, retail and manufacturing due to persistent inflation, and forecast slower growth in the Middle East due to ongoing conflict. In contrast, he expects Europe to grow on cost-optimisation deals and Asia Pacific to outperform. Gartner, however, sees the US as the strongest market, driven by AI, cloud and digital transformation investments, with resilient demand in Europe linked to regulatory, security and sovereignty-related spending.

AI's impact is becoming more visible in financials. Infosys reported AI-related revenue at 8.2 per cent of total in the June quarter, while TCS disclosed annualised AI revenue of USD 2.6 billion. Despite this, Vasu noted AI-led revenue remains under 5 per cent of the industry total, with a growing share of client budgets in the US and Europe shifting to native AI platforms and start-ups, reducing reliance on traditional services.

Gartner warned that generative and agentic AI are beginning to reduce demand for labour-based services, especially in managed services and service desks, estimating that by 2030, up to 50 per cent of traditional managed-services opportunities may be hard for incumbents to win.

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