India IT Sector Q1 FY27: Muted Growth, Tier-2 Firms Shine

India’s IT sector recorded muted growth in the first quarter of fiscal year 2027, aligning with analyst expectations for a soft demand environment. Tier-2 IT services companies notably outperformed their larger counterparts in revenue expansion.

Revenue Growth Driven by Tier-2 Firms

The quarter saw Tier-2 IT services companies achieve a median revenue growth of 1.8% quarter-on-quarter in constant currency (Q-o-Q CC), according to Motilal Oswal Financial Services (MOFSL). This significantly surpassed Tier-1 players, who posted only 0.4% Q-o-Q CC growth.

• Persistent grew 4.1% Q-o-Q CC.
• Hexaware reported 4.4% Q-o-Q CC growth.
• Tech Mahindra increased 2.6% Q-o-Q CC.
• Tata Technologies expanded 4.3% Q-o-Q CC.
• Mphasis saw growth of 2.1% Q-o-Q CC.
• Coforge posted exceptional 22.3% Q-o-Q CC growth, with 1.1% organic.
• Wipro declined 1.2% Q-o-Q CC.
• HCLT fell 0.5% Q-o-Q CC.
• KPIT contracted 3.6% Q-o-Q CC.

TCS and LTM remained largely flat, while Infosys underperformed with 1% Q-o-Q CC growth during what is typically a strong quarter for the company. Analysts highlighted the sustained market share gains by Tier-2 firms as a key trend.

Margin Expansion Amidst Investments

Ebit margins for Tier-1 companies expanded by 20 basis points year-on-year to reach 20%, while Tier-2 margins improved by 10 bps to 14.5%. These gains stemmed from effective margin management initiatives, higher utilization rates, increased offshoring, and a leaner pyramid structure, complemented by some currency tailwinds.

However, ongoing investments in AI, the ramp-up of large deals, strategic partnerships, and lateral hiring partially offset these profitability improvements. Sandeep Shah, Director – IT at Equirus Securities, noted that the top-6 large-cap companies generally met or exceeded expectations for constant currency US dollar sales growth and Ebit margins, aided by currency depreciation and stable supply-side conditions.

• TCS implemented wage hikes in Q1FY27.
• Tata Elxsi and Tata Technologies are scheduled for wage hikes in Q2FY27.

Divergent Total Contract Value Trends

The deal landscape presented increased competition and divergent Total Contract Value (TCV) growth across firms. Vendor consolidation primarily drove robust TCV deal wins across most top-6 large-cap firms, rather than a significant increase in discretionary spending, Shah explained.

• HCL Tech and Tech Mahindra saw approximately 33% year-on-year TCV growth.
• Wipro’s TCV declined by about 32% year-on-year.
• Persistent achieved TCV growth of around 120% year-on-year.
• Coforge recorded TCV growth of approximately 36% year-on-year.
• Mphasis experienced a TCV decline of about 39% year-on-year.
• KPIT’s TCV decreased by about 13% year-on-year.

Guidance for revenue growth remains mixed, with some companies anticipating strong FY27 growth. However, MOFSL analysts project a guidance cut from Infosys. Most management teams expect margins to stay range-bound throughout FY27.