IT Q2 Earnings Preview: Infosys may cut FY27 guidance; here's what to watch

Infosys Ltd. is expected to lower its FY27 revenue growth guidance when it reports its second-quarter results, as muted organic growth continues to weigh on the outlook for India's large IT services companies.

Infosys currently guides for constant-currency revenue growth of 1.5%-3.0% for FY27. Brokerage estimates suggest the company could narrow the range, with Kotak Institutional Equities expecting guidance of 1.5%-2.5%, while Citi sees a 1%-2% range.

The reported growth outlook, however, is expected to receive support from acquisitions. Around 170 basis points of Infosys' FY27 growth is expected to come from acquisitions, providing some cushion to underlying organic growth.

HCL Technologies, meanwhile, is expected to retain its organic growth outlook broadly unchanged, even as acquisitions lift its reported revenue guidance. Its reported constant-currency growth guidance could be raised to 3.0%-4.0% from 1.0%-4.0%, supported by contributions from the Jaspersoft and HPE Telco Solutions acquisitions.

On an organic basis, HCLTech's constant-currency growth range is expected to move to 2%-3%, with a 2.5% midpoint. That leaves the midpoint unchanged from the earlier guidance, while narrowing the range.

Acquisitions to cushion Q2 growth

Acquisition-led growth is expected to be a key feature of the September quarter for several large and mid-sized IT services companies.

Coforge is expected to receive the biggest inorganic boost, with the Encora acquisition contributing around 820 basis points to revenue growth. HCLTech is expected to get a roughly 110-basis-point contribution from HPE Telco Solutions and Jaspersoft.

For Wipro, acquisitions of Mindsprint and AlphaNet are expected to provide an estimated 80-basis-point boost, while Hexaware could get a similar 80-basis-point contribution from its CPS contract acquisition.

Infosys is expected to see around 50 basis points of full-quarter contribution from Optimum Healthcare, while Mphasis could get a similar contribution from Red Oak.

Persistent Systems is also expected to see revenue contribution from its Nagarro acquisition in the second quarter.

The acquisition-led support comes as organic growth remains subdued across the large-cap IT services segment. Citi expects growth among large-cap companies to remain muted, while mid-cap IT companies are expected to outperform.

Valuations offer some cushion

Despite the weak growth outlook, valuations across Indian IT have moderated. Kotak said the NSE IT index is trading at around 16 times one-year forward consensus earnings, below its pre-pandemic five-year average.

Indian IT stocks, however, continue to trade at a premium to several global IT services peers. Citi’s estimates put CY27 price-to-earnings multiples at 11.7 times for Accenture, 8.7 times for Capgemini, 9.0 times for Cognizant, 7.6 times for EPAM Systems, 7.3 times for Genpact and 5.7 times for Globant.

AI-driven deflation remains a key overhang

Beyond near-term guidance, AI-led productivity and pricing pressure remain a structural concern for the sector.

Kotak has estimated that AI-driven revenue deflation could amount to around 3%-3.5% annually for Indian IT services as companies use AI to deliver existing work more efficiently and pass some of those productivity gains on to clients.

The brokerage's framework also points to a deflationary impact from existing services being delivered more efficiently, with part of the productivity gains potentially reinvested into new AI-led use cases.

This creates a difficult transition for IT services companies: while AI can generate new demand for areas such as implementation, data engineering, cloud, cybersecurity and AI transformation, those opportunities need to offset pricing and productivity-related pressure on the much larger existing revenue base.

Kotak expects the deflationary phase to persist through FY27-FY28, with a potential crossover towards net growth from AI-led demand thereafter.

For the September quarter, therefore, acquisitions could provide a near-term boost to reported growth even as the underlying environment remains challenging for organic growth. The focus will be on how much of that inorganic growth translates into the headline numbers, and whether management commentary points to any improvement in discretionary technology spending and AI-led demand.

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