US-Iran war, AI concerns drag Indian firms into weak quarter
What's the story
Top Indian IT companies are expected to witness a lackluster fourth quarter, with revenue and profit growth projected at around 10% year-on-year (YoY). The growth is mainly attributed to a weaker rupee rather than any underlying business expansion, seven brokerages have said. The upcoming earnings season will see Tata Consultancy Services (TCS), Infosys, and HCLTech, among others report their Q4 results starting April 9.
Market challenges
Deal wins may remain subdued amid macro uncertainties
The ongoing global conflicts, weak discretionary spending, and worries over artificial intelligence (AI) are expected to continue impacting client budgets. These factors have led to a cautious revenue outlook for the next fiscal year. Ambit Capital analysts said they expect limited deal win surprises, patchy ex-BFSI growth, and a slow start to H1 2027 due to macro/gen AI uncertainty.
Currency impact
Weaker rupee will inflate profits
The Indian rupee depreciated 4% against the US dollar in the March quarter, hitting record lows. Software services companies usually benefit from such currency fluctuations as they bill in foreign currencies while incurring most costs in rupees. This results in inflated profits when dollar revenues are converted. The $315 billion sector employs some 5.9 million people and last saw double-digit revenue growth in Q1 2023.
Market shift
Infosys, HCLTech likely to provide conservative revenue forecasts
Since March 2023, demand in the IT sector has softened as clients have cut discretionary spending and deal cycles have lengthened. Spending is now more focused on cost optimization and AI-led projects. Infosys and HCLTech are likely to provide annual revenue forecasts of 2%-4% and 4%-6% growth respectively for FY27, brokerages said.
Growth forecast
Top 6 firms expected to see revenue growth
The top six firms in the Indian IT sector: TCS, Infosys, HCLTech, Wipro, Tech Mahindra and LTM, are expected to witness a 10.9% YoY rise in revenue for the March quarter. Their net profit is also likely to increase by 10.3%. However, on a constant currency basis (excluding exchange-rate effects), Ambit Capital predicts that the top four firms will only see a modest 1.8% revenue growth for the year.
Sectoral outlook
Discretionary spending cuts could hurt these sectors
Yes Securities analysts predict an uneven performance across sectors, with banking and financial services likely to show relative resilience. However, retail, healthcare, and hi-tech segments could come under pressure due to their higher exposure to discretionary spending. Jefferies analysts also noted that overall client budgets have not increased materially and discretionary spending remains subdued.
AI impact
Stock prices may react positively to modest revenue forecasts
HSBC analysts say even a modest revenue forecast could support stock prices, as valuations currently reflect only low-single-digit growth. However, fears over the impact of AI are difficult to validate or falsify, according to Motilal Oswal analysts. They added that the burden of proof now sits with IT companies, and their re-rating depends on proof of surviving and thriving amid these challenges.