Analysts predict that leading Indian IT companies are likely to show slowing revenue growth and relatively stable margins in the fourth quarter (July-September) as clients maintain tight control over discretionary budgets. The main focus is on the speed of converting strong leads into actual revenue and the extent of demand reduction for traditional services due to artificial intelligence (AI).
The research firm UnearthInsight expects the five largest IT companies to grow by 0.5–1% in the quarter in the second fiscal year of 2027, which will not be the best performance compared to the April-June period. Gaurav Vasu, founder and CEO of UnearthInsight, noted that the second quarter will not be better than the first, as there is a lack of revitalization in client budgets and spending. Discretionary spending remains stagnant amid geopolitical tensions, and decision-making cycles remain prolonged.
Gartner assesses this quarter as 'somewhat stronger' compared to the previous one, largely because previously approved contracts are starting to generate revenue. However, according to Bishwajit Maiti, Senior Principal Analyst at Gartner, market conditions remain generally unchanged, with cautious discretionary spending and a constant focus on performance results influencing purchasing decisions.
Vasu emphasized that despite maintaining a strong pipeline of leads, their conversion into revenue will take longer, and decision-making cycles will remain long over the next 12–18 months. The Q2 earnings season will begin with Tata Consultancy Services (TCS) on October 8, followed by HCLTech on October 12, and Infosys will report its results on October 23.
UnearthInsight maintains an annual growth forecast of 3–4% for leading firms, assuming that most of this growth will be driven by inorganic growth rather than increased demand. In fiscal year 2027, the technology services industry has already spent $3.6 billion on 14 mergers and acquisitions (M&A). Vasu also warned that margins will come under pressure due to recent wage increases and the need to include investments in AI platforms and partnerships in deals to close them. Efficiency gained through AI is also being passed on to clients.
According to UnearthInsight, real margin support will come from the sale of applications and platforms, not just services. The company expects a slight margin improvement for individual top-tier players like TCS, Infosys, and HCLTech, while mid-tier firms will maintain current margins, absorbing M&A integration costs. Gartner forecasts that margins will remain generally stable, with limited growth potential, as productivity gains from automation and resource optimization are offset by AI investments, skilled labor wage inflation, and customer price reduction demands.
Maiti noted that client technology spending remains cautious, and organizations continue to prioritize initiatives that deliver measurable business results, cost optimization, and risk reduction. Although demand is supported by AI, cybersecurity, and modernization initiatives, transformation programs linked to discretionary spending remain subject to stricter budget controls and longer approval cycles. Consequently, spending is gradually improving, but the overall demand environment remains disciplined, not fully recovered.
Vasu pointed out that the banking sector is under pressure, while retail and manufacturing are struggling due to the lack of inflation reduction. He named the US as the weakest market. Europe, he said, will grow through cost optimization deals, and the Asia-Pacific region will show faster growth, while the Middle East will slow down significantly due to the war.
Gartner sees the strongest demand in the BFSI, healthcare, manufacturing, and telecommunications sectors, while retail, oil, and gas show comparatively weaker performance. The US remains the strongest market, supported by investment in AI, cloud technologies, and digital transformation. Europe maintains resilience due to spending related to regulation, security, and sovereignty.
Regarding the impact of AI on total sales volume, Vasu reported that AI-related revenue remained below 5% of the total industry volume. He added that the growing share of client budgets in the US and Europe is directed towards native AI platforms and startups. Furthermore, software providers such as SAP and Oracle are selling more products with built-in AI, reducing the need for traditional services. Gartner believes that generative and agentic AI are beginning to 'significantly reduce' demand for labor-based services, especially in managed services and service functions. According to Gartner estimates, incumbents will find it difficult to capture up to 50% of the managed services opportunities by 2030.
Companies have begun disclosing AI revenue data. In the June quarter, Infosys reported that AI-related revenue accounted for 8.2% of total revenue, and TCS reported an annual AI revenue of $2.6 billion. Vasu speculated that mid-tier firms will continue to outperform larger companies, although their growth will also slow down, and acquisitions by companies like Coforge and Persistent will put pressure on growth. UnearthInsight expects a slight recovery in fiscal year 2028 with about 6% growth.
