IT Sector – Indian Technology Firms Face Slower Start to FY2027
IT Sector – India’s information technology sector is expected to begin the first quarter of FY2027 on a subdued note, with revenue growth likely to be affected by the conflict-related disruption in West Asia and increased productivity-linked pass-throughs in managed services contracts. Kotak Institutional Equities said large technology services companies may also find it difficult to reach the midpoint of their annual revenue guidance.
Revenue Estimates and Valuations Revised Lower
The brokerage has marginally reduced its revenue forecasts for the sector for FY2027 to FY2029, cutting estimates by around 0-1 per cent. It has also lowered fair value estimates for several IT stocks by 2-21 per cent, reflecting a more cautious view of medium-term growth and profitability.
Kotak said the expected weakness in the opening quarter could make it harder for companies to maintain the growth pace required to meet their stated guidance ranges. The report expects many firms to remain below the midpoint of their FY2027 outlook.
Generative AI Raises Concerns Over Pricing
A major reason for the revised assessment is the growing impact of generative AI on software and technology services pricing. Kotak has moved its estimate for GenAI-driven pricing deflation to the higher end of the 3-3.5 per cent range.
The brokerage said rapid improvements in advanced AI models, particularly in software-related tasks, are increasing the possibility that clients will seek greater productivity gains and lower pricing from service providers. This could place further pressure on billing rates in segments where automation can replace or reduce manual effort.
The report also raised its cost of equity assumptions, citing the possibility of wider business disruption over the medium term as AI adoption accelerates across the global technology services market.
Rupee Depreciation Offers Limited Immediate Relief
The weakening rupee has provided some support to operating margins, as Indian IT companies earn a significant share of their revenue in foreign currencies. During the quarter, the rupee depreciated 2.6 per cent sequentially and 9.7 per cent from a year earlier.
However, Kotak said the currency movement may not result in an immediate improvement in net profit for several companies. Many large IT firms have hedged their future foreign currency cash flows, which could lead to sizeable forex losses even as the rupee remains weaker.
As a result, operating performance may improve without a similar rise in reported profit after tax. The brokerage expects this gap between business performance and bottom-line growth to remain visible through FY2027.
Mid-Tier Firms Have Limited Currency Upside
According to the report, many mid-sized IT companies have already secured a large portion of their FY2027 profit and loss exposure through currency hedging. Their hedge positions are generally believed to be in the USD/INR range of 90-92.
This means the benefit from further rupee depreciation may not fully flow into earnings during the year. While revenue and operating margins could receive support from currency movements, the final profit impact may remain limited because of existing hedge contracts.
M&A Activity Gains Momentum Across the Industry
The report also pointed to a noticeable rise in merger and acquisition activity across the Indian IT sector during 2026. Companies are pursuing deals for different reasons, including expanding service capabilities, improving scale, strengthening industry expertise and entering new geographic markets.
Some acquisitions are focused on gaining access to specialised technology skills and platforms, while others are intended to support revenue growth through customer relationships and market reach. Kotak noted that a few transactions involve service areas that may themselves face pricing pressure as generative AI adoption expands.
The next phase of dealmaking will indicate whether IT companies increasingly focus on AI capabilities and platform acquisitions or continue to rely on deals that add revenue, clients and regional access. That choice could shape how the sector responds to changing demand and pricing conditions in the coming years.