Will India's IT Services Experience Recovery by FY27?
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Synopsis
India's IT services sector is projected to grow at a sustainable rate of 4-5% by FY27, according to HSBC Global Investment Research. Despite current macroeconomic challenges, analysts foresee a recovery as companies adapt. Discover the insights that could redefine your investment strategy in this evolving landscape.
Key Takeaways
- Sustainable growth for India's IT services sector projected at 4-5%.
- Recovery anticipated in FY27 amid macroeconomic challenges.
- Q2 FY26 growth likely limited due to soft demand.
- Large-cap IT firms expected to see 0-2% growth.
- Active management of large-cap stocks recommended.
New Delhi, Oct 3 (NationPress) The sustainable growth of India’s IT services sector is projected to fall between 4 to 5 per cent, exceeding the trendline observed over the last three years, according to a report released on Friday.
Analysts predict reduced macro volatility in the upcoming quarters, anticipating a recovery in growth during FY27, as indicated by the research from HSBC Global Investment Research.
However, the IT services sector is not expected to see significant improvements in Q2 FY26, as demand remains subdued due to macroeconomic uncertainties and the deflationary impact of artificial intelligence, the report noted.
These factors may not see a turnaround until FY27, given the global headwinds that are cushioning pricing pressures, the report further stated while offering a 'buy' rating on several IT stocks.
Growth for the second quarter is expected to align with the first quarter, primarily driven by vendor consolidation and cost-rationalization efforts, which HSBC termed a “zero-sum game.”
The research firm highlighted, “The sustainable growth rate for the sector is unlikely to exceed 4-5 per cent, despite the fact that growth has been below this trend rate for the past three years. FY24 and FY25 suffered from share loss to GCCs, while FY26 has been impacted by both AI deflation and an unstable macro landscape.”
Despite robust recent corporate results from the US, companies are still hesitant to embark on discretionary new initiatives, the report observed.
Quarterly forecasts suggest that large-cap IT firms are expected to see sequential growth of 0–2 per cent in dollar terms. Mid-tier companies may face a decline of 1 per cent or growth up to 5.5 per cent, according to the firm's projections.
Nonetheless, the firm emphasized that large-cap IT stocks can no longer be classified as five-year buy-and-hold compounding investments and require active management due to their cyclical and volatile nature.
Point of View
The insights from HSBC Global Investment Research shed light on the cautious optimism surrounding India's IT services sector. While growth may be stunted in the short term, the potential for recovery by FY27 aligns with a broader strategy to navigate economic uncertainties effectively.
NationPress
03/10/2025
Frequently Asked Questions
What is the projected growth rate for India's IT services?
The projected growth rate for India's IT services sector is expected to be between 4 to 5 percent by FY27.
Why is growth in Q2 FY26 expected to be limited?
Growth in Q2 FY26 is expected to be limited due to soft demand resulting from macroeconomic uncertainties and the impact of artificial intelligence.
What factors could affect the IT services sector in FY26?
In FY26, the IT services sector is likely to be affected by AI deflation and a challenging macroeconomic environment.
How are large-cap IT firms expected to perform?
Large-cap IT firms are anticipated to achieve sequential growth of 0-2 percent in dollar terms.
What does the report suggest for investors in large-cap IT stocks?
The report suggests that large-cap IT stocks require active management around their cycles and volatility rather than being viewed as long-term hold investments.
