ITSector – Indian IT Companies Face Slow Q2 Growth as AI Reshapes Demand Trends

ITSector –Digital transformation and enterprise AI adoption continue to influence the Indian IT industry while weak client spending and pricing pressure remain key business challenges.-

India’s information technology industry is likely to experience another challenging quarter in Q2FY27, with large IT service providers expected to record only limited sequential revenue growth, according to a recent report by Kotak Institutional Equities. The report suggests that Tier-1 technology companies may post growth of around 0–2 percent during the quarter, while several mid-sized firms are expected to perform comparatively better because of stronger client wins and market share gains.

Mixed First Quarter Reflects Market Challenges

Kotak Institutional Equities observed that the sector delivered mixed financial results during Q1FY27 as global geopolitical developments, economic uncertainty and company-specific challenges affected technology spending. Several businesses postponed project rollouts and delayed finalising contracts, resulting in slower revenue growth across many IT companies.

According to the report, firms that successfully executed previously secured large contracts delivered stronger performance. In contrast, companies facing customer-specific demand weakness and pricing-related challenges witnessed slower growth during the quarter.

Client Spending Remains Under Pressure

The report highlighted that discretionary technology spending continued to remain weak as many enterprises adopted a cautious approach because of uncertain global economic conditions. This trend contributed to slower project approvals and delayed implementation schedules.

As a result, multiple Indian IT companies revised their organic growth expectations downward. Even so, the industry continued to secure significant contracts linked to vendor consolidation, digital transformation initiatives, legacy system upgrades, cost optimisation programmes and the expansion of Global Capability Centres (GCCs).

AI Creates New Opportunities but Also Pricing Challenges

While artificial intelligence continues to generate fresh business opportunities, the report noted that its rapid adoption is also creating pricing pressure across the industry. The increasing use of Generative AI is improving productivity, reducing the amount of work required for several software development tasks.

These efficiency gains are affecting billing models, particularly in time-and-material contracts, while also putting downward pressure on pricing for fixed-cost projects. Kotak stated that these developments are already visible through lower spending on software development work and increased competition in managed services contracts.

The report believes these changes are currently affecting established Tier-1 companies more significantly, whereas mid-sized firms have managed to counter some of the pressure by winning new business and expanding their customer base.

Cost Management Supports Profit Margins

Despite slower revenue growth, profitability across the sector has remained relatively stable. However, the report pointed out that this resilience is being supported mainly through strict cost management measures rather than stronger demand.

Companies have benefited from the depreciation of the Indian rupee while also implementing measures such as workforce optimisation, delayed salary increases, reduced variable compensation and tighter operational spending to protect margins.

Outlook for the Coming Quarter

Kotak Institutional Equities expects geopolitical developments and global economic uncertainty to continue influencing business sentiment during Q2FY27. However, an improvement in macroeconomic conditions could gradually reduce delays in project approvals and contract execution.

For the quarter ahead, Tier-1 Indian IT companies are expected to report modest sequential revenue growth of up to 2 percent. In comparison, mid-tier technology firms are projected to deliver moderate to healthy growth, supported by stronger execution, new client acquisitions and continued market share expansion.

The report also noted that although AI-related services are generating healthy demand, the benefits from these emerging opportunities are unlikely to fully offset the pricing and volume pressures affecting the industry’s traditional business segments in the near to medium term.