IT Navigates Peak Pessimism by Prioritising Growth in Stable Q2

What happened

India's software services sector, valued at more than $300 billion, saw IT companies prioritise expansion and investment over profit margins in a stable second quarter, with analysts saying artificial intelligence is becoming a significant revenue driver for most Indian IT companies.

Confirmed

Global impact / market context

Companies choosing growth over profit per sale suggests they expect future demand, so near-term earnings may stay muted. The BSE IT index rose over 14% since TCS results on October 8, yet Jefferies said this came from valuation rerating, which means investors paid more for the same earnings.

Analyst inference

The industry is on track for 3-4% growth in FY27, with no meaningful recovery expected in the first half and demand still subdued. Legacy work is shrinking 3-5% while AI work grows 20-30%, but AI-driven deflation keeps dollar revenue almost flat despite healthy deal wins.

Analyst inference

What to watch

1. Watch whether dollar revenue growth across the top tiers stays almost flat despite healthy deal wins, as efficiency gains from utilisation and foreign exchange effects offset new work. Confirmed
2. Track whether AI work, growing 20-30%, begins adding meaningfully to revenue rather than deflating prices, since analysts say it is not yet contributing significantly. Proposed
3. Watch pricing pressure and profit margins, because companies are trading margin for expansion, so weaker profit per sale could test the valuation rerating that drove the stock rally. Analyst inference

Evidence

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