India's IT giants may face another earnings setback

India's leading IT firms are anticipated to report further disappointing earnings and potentially revise their annual revenue growth projections, according to five brokerage firms. The surge in AI-driven pricing pressures and subdued client spending are primarily to blame. With $315 billion in revenue, the $315-billion IT sector has been among the market's most underperforming over the past year, and AI-driven deflation is expected to persist.

Tata Consultancy Services leads the pack, with results due on October 8, followed by Infosys, HCLTech, and Wipro later in the month. IT companies typically flourish in the first two quarters of the fiscal year, buoyed by higher billable days and project starts. However, first-quarter results were lackluster, and expectations for the second quarter are similarly dim.

The industry, which employs nearly 6 million people in the world's most populous nation, is projected to report its weakest sequential performance in three years for the July-September quarter, with revenue growth expected to range from 0.7% to 3.5% quarter-over-quarter for the top six firms. Year-over-year, analysts predict revenue to increase by about 10% in rupee terms. While acquisitions and deal ramp-ups could bolster performance for some large companies, organic revenue growth is expected to remain weak.

The Nifty IT has slipped around 27% this year, trailing the benchmark Nifty 50's 13.4% decline. With demand conditions largely unchanged since the last quarter, investors will scrutinize annual revenue growth forecasts. Infosys is expected to revise its revenue growth forecast to 2.5%, while Jefferies anticipates a more substantial cut to 0.5% to 2%.

HCLTech and Tech Mahindra are likely to lead among the larger companies, while Wipro may lag. Margins may improve marginally, thanks to currency depreciation offsetting some pricing pressures, though foreign exchange hedging losses could dampen profits at Tech Mahindra, Coforge, and Hexaware.