Muted Q1 Ahead: Why AI Has Become Indian IT's Biggest Near-Term Challenge

The June quarter is shaping up to be another challenging one for India's $280-billion information technology services industry, with analysts expecting muted revenue growth, cautious management commentary and limited visibility on a meaningful demand recovery.

While artificial intelligence (AI) continues to dominate corporate technology spending globally, Indian IT companies are yet to fully benefit from the trend. Instead, AI is increasingly emerging as a near-term headwind, prompting clients to demand productivity gains, renegotiate pricing and delay discretionary technology spending until the economics of AI deployment become clearer.

Brokerages expect most Tier-I IT companies to report either flat or marginal sequential revenue growth in the June quarter. The quarter is also expected to mark another period where investors focus less on reported earnings and more on management commentary around demand, AI monetisation, large deal conversions and FY27 guidance.

The sector has already endured a difficult year. The Nifty IT index remains sharply below its highs as concerns over AI-led disruption, slowing global technology spending, geopolitical uncertainties and the rapid expansion of Global Capability Centres (GCCs) continue to weigh on sentiment. While valuations have corrected significantly, analysts believe a sustained re-rating will require clear evidence that AI is beginning to create incremental revenues rather than merely reducing billing rates and employee requirements.

Revenue Growth Likely To Remain Under Pressure

Most brokerages expect the June quarter to remain weak across large-cap IT companies despite isolated pockets of resilience in banking and technology spending.

Centrum Broking expects Tier-I companies to report sequential constant-currency revenue growth ranging from a decline of 0.9% to growth of 1.5%. Infosys is expected to lead the large-cap pack with around 1.5% sequential growth, helped partly by acquisitions, while TCS is likely to remain largely flat. HCLTech and Wipro are expected to report declines, whereas Tech Mahindra may post modest growth driven by telecom-related deal ramp-ups.

Elara Capital also expects demand conditions to remain subdued, pointing to a sharp slowdown in large deal announcements during the quarter. According to the brokerage, elongated decision-making cycles and discussions around AI-led productivity sharing with clients continue to delay revenue conversion despite healthy total contract values.

Among mid-cap companies, Persistent Systems and Mphasis are expected to outperform their larger peers, while Coforge may report relatively muted sequential growth because of the exit from its India business. Analysts believe mid-tier companies continue to benefit from specialised capabilities, faster execution and stronger deal momentum in niche verticals.

ICICI Securities estimates sequential constant-currency revenue growth of between negative 0.9% and positive 1.1% for the top six IT services companies. The brokerage believes delays in converting total contract value (TCV) into revenue, combined with increasing AI-related pricing pressure, are extending the industry's prolonged low-growth phase.

AI Is Driving Demand, But Also Creating New Risks

Artificial intelligence has become the biggest paradox for India's IT services industry. While virtually every major technology company is investing aggressively in AI capabilities, the immediate commercial benefits for traditional IT vendors remain limited. Instead, clients are increasingly using AI as a negotiating tool to demand lower prices and greater productivity from vendors.

According to Centrum Broking, enterprises remain cautious about large-scale AI adoption despite growing interest in the technology. Decision-making cycles have become longer as customers attempt to understand how AI should be integrated into existing operations and whether the expected productivity gains justify fresh technology investments.

ICICI Securities believes the industry is now experiencing AI-led deflation, with automation reducing the number of billable engineering hours required for software development, maintenance, testing and support services. The brokerage argues that large IT companies, whose revenues remain heavily dependent on these traditional services, are particularly vulnerable if AI adoption accelerates faster than new AI-related revenue opportunities emerge.

The brokerage has consequently turned negative on the sector, particularly large-cap IT companies, warning that a sustained recovery may take longer than previously anticipated unless enterprise AI use cases begin generating meaningful incremental revenues.

Centrum, however, adopts a more balanced view. It expects AI services to evolve into a $300-400 billion opportunity globally by 2030, arguing that although AI may initially reduce pricing, it could eventually increase revenue per employee through higher productivity while opening entirely new consulting and implementation opportunities.

GCCs Continue To Intensify Competitive Pressure

Apart from AI, another structural challenge confronting Indian IT companies is the rapid expansion of Global Capability Centres.

Brokerages note that multinational corporations are increasingly setting up captive technology centres in India rather than outsourcing large portions of their digital transformation work to traditional IT vendors.

Centrum highlighted that Indian IT services exports grew nearly 12% during FY26, significantly ahead of the roughly 4% revenue growth reported by the country's five largest listed IT companies. The divergence indicates that a growing share of technology spending is flowing towards GCCs rather than established outsourcing firms.

ICICI Securities echoed similar concerns, pointing out that spending is increasingly shifting towards AI infrastructure providers, software companies and captive technology centres instead of traditional IT services vendors.

Industry participants also report that pricing competition has intensified considerably. Clients are demanding productivity improvements upfront, while vendors are increasingly willing to sacrifice margins to retain strategic accounts. Even Tier-I companies are competing aggressively for smaller clients, creating additional pressure across the broader industry.

Margins May Stay Stable, But Guidance Will Be Critical

Despite sluggish revenue growth, operating margins are expected to remain broadly stable during the June quarter, supported partly by the depreciation of the rupee against the US dollar.

Centrum estimates that the rupee weakened around 3.4% sequentially during the quarter, providing a natural hedge for export-oriented IT companies. However, continued investments in AI capabilities, wage hikes and higher deal execution costs are expected to offset much of this benefit.

TCS is expected to report the sharpest margin decline because of annual salary revisions, while Coforge could also see margin pressure following the Encora acquisition. Infosys, HCLTech and Tech Mahindra are expected to post modest sequential improvements through operational efficiencies and better utilisation.

Management commentary on FY27 guidance will therefore assume greater importance than the quarterly numbers themselves.

Brokerages expect Infosys to retain its revenue growth guidance of 1.5-3.5% for FY27, although Elara Capital believes the upper end of that guidance could come under pressure if demand fails to improve meaningfully over the next two quarters. HCLTech is expected to maintain its existing growth outlook, supported by recently won mega deals.

Investors will also closely monitor commentary on discretionary spending, AI-related deal wins, hiring plans, offshoring trends and the pace at which signed contracts begin translating into actual revenues.

L-Caps Face More Pressure As Mid-Caps Remain Preferred

Although valuations across the sector have corrected substantially, brokerages believe the investment outlook differs sharply between large-cap and mid-cap companies.

ICICI Securities has downgraded its stance on large-cap IT companies, arguing that slower growth, AI-led productivity pressures and prolonged macro uncertainty warrant lower valuation multiples. It now prefers select mid-sized companies such as Mphasis, Coforge and Happiest Minds, where stronger deal pipelines provide better visibility on organic revenue growth.

Centrum Broking similarly expects select Tier-II companies to outperform larger peers through FY27, naming Persistent Systems, Coforge and LTIMindtree among its preferred picks. Infosys remains its preferred large-cap stock because of relatively stronger growth prospects and execution.

Elara Capital also expects Persistent Systems and Mphasis to deliver superior sequential growth compared with most large-cap peers while maintaining a constructive stance on Infosys based on valuation comfort.

The consensus across brokerages is that although valuations have become considerably more attractive after the sector's correction, a sustained re-rating will require visible improvement in discretionary spending, stronger deal conversions and evidence that AI is becoming a meaningful growth driver rather than merely compressing pricing.

For now, the June quarter is expected to reinforce the industry's transition phase. AI continues to reshape client priorities and delivery models, but the benefits for India's IT services companies remain largely prospective. Until companies demonstrate that new AI-led opportunities can offset the productivity and pricing pressures created by the technology, earnings growth is likely to remain subdued and investors may continue favouring selective mid-cap names over traditional large-cap leaders.