Indian IT Q2 earnings face AI pricing squeeze as organic growth slows

India’s major IT companies are heading into their September quarter earnings season caught between healthy order books and shrinking pricing power, as enterprise clients demand that artificial intelligence productivity gains be written directly into contract renewals.

While deal volumes remain active, revenue expansion is grinding down. The pressure has already punished equity markets: the Nifty IT index has tumbled roughly 39 per cent from its December 2024 peak of 46,088.90, reflecting deep investor scepticism over whether traditional outsourcing models can withstand rapid AI adoption.

Brokerage forecasts for the second quarter point to the weakest growth for large vendors in three years. Jefferies expects aggregate sequential revenue to rise 1.7 per cent in constant-currency terms, but organic growth to crawl at just 0.8 per cent. Large firms are expected to expand by an average of 0.5 per cent, compared with 3.5 per cent for mid-sized rivals.

Why AI has become a pricing problem

Instead of opening up new spending, artificial intelligence is primarily driving contract deflation. Kotak Institutional Equities estimates gross deflation across the sector at roughly 7 per cent and net deflation at 3.5 per cent, noting that deal wins now serve to protect an IT firm’s relevance rather than guarantee actual expansion.

Clients renegotiating long-term agreements are demanding lower headcount requirements, shorter delivery schedules and smaller billings. This repricing is hitting application management services hardest, where frequent renewal cycles allow enterprise customers to quickly pocket savings generated by automated coding tools and autonomous agents.

Emkay Research noted that efficiency targets are now routinely embedded into renewal terms, vendor consolidation programmes and cost takeout pacts, leaving tech vendors with less revenue from the same volume of work.

Acquisitions masking underlying weakness

Headline numbers for the quarter may look steadier than core operations warrant because several companies are leaning on recent mergers and contract rollouts. HCLTech, Infosys, Coforge and Cyient are all set to show revenue contributions from acquisitions or major deal transitions.

Motilal Oswal Financial Services expects sequential constant-currency growth among large firms to sit between a 0.5 per cent contraction and a 3 per cent gain. HCLTech is projected to lead large-cap growth at up to 3 per cent, followed by Infosys at 1.8 per cent and Tech Mahindra at 1.7 per cent. Tata Consultancy Services is pegged at roughly 0.5 per cent, while Wipro is forecast to contract by between 0.5 and 2 per cent.

Infosys faces the steepest guidance risk. Both Emkay and Kotak expect the company to shave 25 basis points from its FY27 revenue growth guidance midpoint to 1.5–2.5 per cent, while Jefferies forecasts a steeper cut of 100 basis points down to 0.5–2 per cent.

Mid-tier firms maintain growth edge

Mid-sized software exporters continue to pull away from their larger peers, forecast to post sequential growth ranging from zero to 12 per cent. JM Financial noted that mid-tier vendors currently trade at a 75 per cent valuation premium over large caps, backed by stronger visibility and potential for double-digit organic growth in FY27.

Operating margins across the sector should offer a brief bright spot, aided by rupee depreciation and cost-tightening programmes. Motilal Oswal expects margins to expand by roughly 120 basis points at HCLTech and 100 basis points at TCS. Yet analysts warn that currency tailwinds merely delay the broader pricing problem, with typical year-end client furloughs expected to keep the December quarter just as tight.