IT Q2 preview: Muted growth, steady margins likely; deal conversion, AI deflation in focus

India's leading IT firms anticipate a slowdown in revenue growth and stable margins during the July-September quarter as clients remain cautious with discretionary budgets, according to analysts. Research firm UnearthInsight predicts the top-five IT providers to experience a quarter-on-quarter growth of 0.5-1%, similar to the April-June period.

Gaurav Vasu, UnearthInsight's founder and CEO, attributes the lack of improvement to the persistence of tight discretionary spending influenced by geopolitical tensions and lengthy decision cycles. Gartner forecasts the quarter as somewhat stronger than the previous one, driven by previously awarded contracts moving into revenue-generating phases.

However, market conditions remain largely unchanged, with cautious discretionary spending and a focus on productivity outcomes influencing purchasing decisions. Bates Consulting estimates that growth among leading IT services providers will remain modest throughout Q2. The Q2 earnings season kicks off with Tata Consultancy Services on October 8, followed by HCLTech on October 12 and Infosys on October 23.

UnearthInsight maintains its full-year growth estimate of 3-4% for the top firms, primarily driven by inorganic growth rather than an increase in demand. The tech services industry has spent USD 3.6 billion on 14 M&A deals in FY27. The tech services industry's margin stress comes from recent wage hikes, investments in AI platforms, and the need to incorporate these costs into deals.

Gartner anticipates that margins will remain broadly stable, with limited room for expansion, as productivity gains from automation and AI investments are offset by wage inflation and client demands for pricing concessions.