Brokerages and analysts remain cautious on the near-term outlook, pointing to weak global demand and limited discretionary spending by clients. Ravi Singh of Master Capital Services said expectations for Q4 remain subdued, with modest revenues and poor deal performance likely as companies continue to face demand-side stress.
Emkay also expects muted growth for IT services companies in Q4, driven by fewer working days and continued caution among clients. Growth is likely to be uneven across sectors, with BFSI holding up relatively well while recovery in verticals such as healthcare, manufacturing, retail and hi-tech remains patchy.
Sequential revenue growth is expected to remain weak across the sector. ICICI Securities estimates constant currency revenue growth in the range of -0.3% to 3.2% for Q4, indicating that most companies are likely to report either flat or marginal growth. Jefferies also expects aggregate revenues to remain largely flat quarter-on-quarter, reinforcing the view that demand has not picked up meaningfully.
The pressure is not limited to growth alone. Margins are expected to be mixed, influenced by wage hikes, restructuring costs and deal ramp-ups. However, a sharp depreciation in the rupee has provided some cushion. Emkay noted that currency tailwinds could help offset some of the pressure from macro uncertainty and evolving pricing structures.
Beyond the near-term slowdown, AI has emerged as a key structural factor shaping investor sentiment. “Concerns around generative AI have played a major role in the sector’s underperformance in recent months, alongside geopolitical risks such as the Middle East crisis,” another broker JM Financial said.
AI presents two different scenarios
AI presents a complex picture for IT services companies. On one hand, it is expected to drive productivity gains and create new opportunities in automation, cloud and digital transformation. On the other, it raises concerns around pricing pressure and potential deflation in IT budgets.
ICICI Securities noted that AI-led productivity benefits are front-loaded and could weigh on margins if companies are unable to fully capture value over the life of contracts. “However fears of AI-led deflation may be overstated in the immediate term. We expect that such pressures are unlikely to intensify in FY27, supported by stable client budgets and a healthy pipeline of large deals.”
These comments indicate that while AI remains a concern, it may not yet translate into a sharp earnings disruption.
Investor sentiment dented
Investor sentiment has been volatile in recent months. IT sector initially saw a recovery in January, outperforming the broader market, but this reversed sharply in February and March as AI concerns and geopolitical tensions intensified.
Looking ahead, the focus during the earnings season will be on FY27 guidance rather than Q4 numbers alone. Jefferies expects large IT companies such as Infosys and HCL Tech to guide for modest growth in the range of 2-6% year-on-year, suggesting that recovery is likely to be gradual rather than sharp.
Valuations key metric to look at
Valuations also remain a factor. JM Financial pointed out that the sector is currently trading at around 18 times FY27 earnings, and a re-rating is unlikely unless concerns around AI and growth visibility ease.
Given this backdrop, most analysts are not recommending aggressive buying at current levels. Ravi Singh said investors should remain cautious and focus on companies that are actively adapting their business models to integrate AI.
Brokerages are also turning selective. Emkay has upgraded Coforge and eClerx, while JM Financial prefers Infosys among large caps and Mphasis in the mid-tier space. The broader takeaway is that while the sharp correction in IT stocks has improved valuations, the near-term outlook remains uncertain. Weak demand, cautious client spending and evolving AI dynamics continue to weigh on sentiment.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)