The second quarter (Q2FY27) earnings season is just around the corner. As always, the information technology companies are set to detail their results upfront. Another quarter of muted performance is expected for most large companies as demand conditions have neither improved nor deteriorated since last quarter.
Kotak Institutional Equities expects HCLTech to be the notable exception among large caps. The brokerage’s preferred picks are Tech Mahindra, Coforge, Sagility, and Indegene.
The brokerage expects “muted growth” for tier 1 IT companies in what is a seasonally strong quarter. Artificial intelligence deflation and weaker macro will contribute to the weak growth. Kotak expects HCLTech to lead with organic growth of 2% quarter-on-quarter while it projects Infosys to clock 1.1% growth and Tata Consultancy Services to post 0.5% sequential growth.
For Infosys, around 50 basis points of growth in this quarter will be due to the reversal of a headwind seen in the previous quarter. “Underlying organic growth remains modest, reflecting AI-led deflation and a weak demand environment. The Optimum Healthcare acquisition will contribute ~50 bps through a full-quarter consolidation. We expect stable margins,” the brokerage said. Kotak expects Infosys to cut its growth guidance to 1.5-2.5% from 1.5-3%.
HCLTech’s growth will be led by the ramp-up of the Guardian Life deal and seasonal strength. The brokerage expects HCL Tech to raise its revenue growth guidance to 3-4% from 1-3% earlier. “The acquisition of HPE’s Telco Solutions business and Jaspersoft will contribute 110 bps to revenues. We expect stable EBIT margin despite rupee depreciation. Benefits from rupee depreciation will be offset by margin dilution from acquisitions. Expect a strong deal TCV of $3.75 bn, driven by 1 bn euro mega deal and a large deal from Guardian Life,” it said.
The growth in Tech Mahindra, the brokerage’s preferred stock pick, will be driven by contribution from the Orange deal and the ramp up of strong deal wins of the previous quarter. However, this will be partially offset by a decline in Pininfarina revenues after a large program was delivered in the first quarter. Kotak expects steady EBIT margins.
Kotak expects a strong 4.5% organic revenue growth sequentially, driven by the ramp up of large deals and continued strength in execution. The healthcare vertical is likely to lead growth. Stable EBIT margin is expected as operational efficiencies and the benefits of rupee depreciation also flow through.
“The company has indicated a record number of large deals signed during the quarter, which should support growth in subsequent quarters. The deal pipeline remains strong. We expect TCV of deal wins in excess of US$800 mn,” Kotak said.
The brokerage expects organic revenue growth of 1.8% sequentially and Sagility is likely to outperform its peers. This growth will be driven by healthy demand across large clients and resilient performance in mid-market accounts.
“The provider segment is likely to remain steady. CareSeed would have 50 bps incremental revenue contribution during the quarter. Growth yoy will likely be 11.6%,” Kotak said. It also expects the company to upgrade its full year guidance to 13% from 10-12% currently and EBITDA margin guidance to 24.5-25.0% from 24-25%.
Kotak expects 2.7% constant current growth sequentially, enabled by the ramp-up of deals won in earlier quarters. It also expects broad based growth across both enterprise medical and enterprise commercial segments.
It expects investors to focus on growth outlook for the second half of FY27, progress in integration of Biopharm acquisition, progress in client uptake in AI offerings, the extent of deflation from GenAI, and revenue growth outlook from top clients.
The IT sector is bracing for a hit to their earnings in the second quarter, weighed down by AI-related deflation and weak demand. Kotak’s key picks include Tech Mahindra among large caps and Coforge, Sagility, and Indegene in small and midcaps.