Muted Q4 for IT, FY27 outlook capped by macro risks

BENGALURU: After a volatile few months, the March quarter for IT firms is expected to be largely uneventful, weighed down by geopolitical uncertainty and early signs of GenAI-led revenue deflation.IT stocks have declined 19-39% over the past two months, reflecting muted growth amid macro headwinds and structural shifts driven by AI. For the quarter, Motilal Oswal Research expects sequential constant currency growth of -1% to 1.5% for large caps, with mid-caps likely to outperform at -0.5% to 3.5%. Kotak Institutional Equities expects muted sectoral revenue growth, though the year-on-year trajectory is likely to improve for many companies. The absence of furloughs-especially in banking and financial services and retail-offers some support, partly offset by fewer working days. Financial services is expected to drive sequential growth. Among tier-1 firms, TCS is likely to lead, while Persistent Systems may outperform among mid-tier peers.A sharp depreciation of the rupee against the US dollar is expected to drive double-digit year-on-year earnings growth for many companies. Kotak estimates a 40-320 basis point YoY expansion in EBIT margins for the top six IT firms, aided by a 6.5% depreciation in the rupee. However, Wipro and HCLTech may see modest margin declines of 20-30 basis points.While the ongoing conflict has not materially disrupted earnings so far, deal momentum could face near-term pressure. A prolonged escalation may weigh on demand, while the full impact of AI-led deflation is likely to play out over the medium term. The rupee has weakened 3.5% sequentially, supporting stable to improving margins. However, currency gains will depend on hedging. Kotak noted that lightly hedged large firms are likely to see immediate benefits.Motilal Oswal said exit growth rates for most large caps appear relatively favourable, with expected year-on-year constant currency growth exits of 4.3% for Infosys and 4.9% for HCLTech in the March quarter. However, companies are likely to remain cautious in their outlook given the geopolitical backdrop. Infosys is expected to guide FY27 revenue growth of 1.5-4.5% in constant currency, with potential upside if it offsets the ramp-down of its Daimler contract through new deal wins. Infosys won a mega $3.2 billion deal from the German automotive major.Kotak added that rising geopolitical risks and GenAI-led deflationary trends are likely to cap growth guidance despite a healthy deal pipeline. Within this context, Infosys is expected to guide 3-5% revenue growth in FY27, while HCLTech may indicate similar growth, supported by its services mix and large deal ramp-ups.