After 18% Rally and 13% Drop, Indian IT Stocks Face AI’s Real Q2 Math

The past quarter was quite volatile for Indian IT stocks. 

The Nifty IT index climbed 18% from 26,965 on July 2 to 31,823 on August 11. It then fell 13% from that peak and closed at 27,670 on September 29, ending the quarter just 2.6% higher.

Different drivers influenced the rally and the subsequent selloff. 

The July rally came partly as global investors rotated out of crowded artificial intelligence (AI) trades in markets such as South Korea and Taiwan and into India. Foreign investors put more than $1.6 billion into Indian equities that month, according to data compiled by Bloomberg. AIM had earlier reported that the optimism was driven by macro tailwinds from cooling Brent crude oil prices, as well as investors rebalancing their portfolios.

The September selloff brought the AI question back into focus. Investors began weighing whether faster AI adoption would eat into Indian IT’s digital transformation business, even as Indian IT companies reported growing AI businesses.

Market Questions Quality of IT Growth

Indian IT entered the quarter with a growth problem. The AI-driven structural squeeze overshadowed the cyclical lag in client spending.

UnearthInsight Founder and CEO Gaurav Vasu tells AIM that the market has already priced in a weak FY27, with the sector expected to remain in single-digit growth through the year. 

“What makes this more concerning is the quality of that growth,” he says. A large part of the growth has come from acquisitions made over the past two years, and stripping out the M&A contribution leaves organic growth at just 1–2%, he believes.

Global uncertainties, slower client spending, and AI upending the traditional arbitrage model have hollowed out any organic growth. That also clouds investor expectations about the quarter under review. Per Ventura Research, the top five Indian IT companies are expected to deliver subdued growth in Q2 FY27—between 0.5% and 3% on a sequential constant currency basis.

“Q2 financial performance would likely be muted. Discretionary tech spending remains muted,” notes Piyush Pandey, SVP and Lead Analyst for IT, Telecom, Internet, and Power at Centrum India.

Pandey attributes the sharp movements in IT stocks to changing estimates of AI's impact, between deflationary pressure on existing services and the creation of new opportunities.

Sumit Pokharna, Senior Vice President - Fundamental Research at Kotak Securities, believes part of the trend emerges from a shift in client technology spending towards AI. 

“The client’s money has been diverted more to AI-driven [things], and Indian IT services companies were not present in that domain,” he notes.

Vasu says the concern extends beyond Indian IT. He points to declines across global IT services and software companies, arguing that the market is increasingly pricing in the possibility that AI will fundamentally change how enterprises allocate technology budgets.

Both AI Revenue and Productivity are Growing

AI is already showing up on the P&Ls of IT companies.

Tata Consultancy Services (TCS) reported an annualised AI revenue run rate of $2.6 billion in Q1 FY27, up 13.6% sequentially. It also reported $9.5 billion in total contract value (TCV).

HCLTech's Advanced AI revenue reached $171 million, up 62.1% year-on-year in constant currency. Infosys reported that AI revenue accounted for 8.2% of its Q1 revenue.

The question is whether that revenue is incremental.

TCS's numbers show the tension. Strong deal wins have continued even as AI-led productivity puts pressure on the economics of traditional services. AI can also reduce the teams and effort required to deliver work within existing engagements.

Wipro Chief Technology Officer Sandhya Arun said the company's AI initiatives had created capacity equivalent to 20,000 employees, with that capacity redeployed elsewhere in the business.

That is a productivity gain. It becomes a revenue-growth story only if the company can turn the freed capacity into additional work.

AI activity and AI revenue do not necessarily mean incremental revenue. A company can report a growing AI business while also losing revenue from traditional services that AI has made cheaper to deliver.

Pokharna says AI deflation is already becoming visible in the base business and expects pricing pressure to continue.

AI May Widen the Gap

The pressure will vary across Indian IT companies.

Pandey says tier-2 IT companies are better placed to navigate the shift. Vasu expects investors to move towards moderately growing mid-tier companies if larger firms continue to disappoint.

“Challengers continue to offset this with their sheer gains or strong execution, while the incumbents are largely defending the existing revenues,” Pokharna notes.

Persistent Systems, Coforge, and Mphasis have been growing faster than several of their larger peers, while some have also reported strong AI-related deal activity. They are winning engineering, modernisation, and transformation projects can create new sources of revenue as AI changes the way existing services are delivered.

Persistent, for example, has highlighted AI execution, deal wins, and productivity. Its revenue per employee had risen 58.2% between FY22 and Q2 FY26. 

Coforge provides a recent example. In Q1 FY27, the company said 86% of its revenue came from AI-led engineering, data, and cloud services, while 30% of its active delivery projects were already using its AI assets.

But faster growth does not show whether those AI-led deals are replacing revenue lost elsewhere. Organic growth, revenue per employee, and the ability to turn AI productivity into higher-value work will matter more than the number of AI projects announced.

Q2 Earnings Will Offer a Reality Check

Expectations are already low.

“The main reason is AI deflation and, to a lesser extent, weaker macros [which] will continue to weaken the growth,” Pokharna says. He expects muted growth despite the seasonally strong quarter.

Vasu sees Accenture's results as another signal for Indian IT. If the global IT services company's numbers disappoint, he expects further pressure on the sector and a possible rotation away from slower-growing large firms towards mid-tier companies.

Pokharna says the market's concern has shifted.

“In between, the big question which came to the minds of the investors [was], will these Indian IT companies exist or not going forward? So, we believe that concern is behind us,” he says.

Revenue growth will matter, but the organic component will matter more than headline growth. Investors will also be watching whether large AI-led TCV converts into production work and billing, and whether pricing and margins hold as productivity improves. Headcount, utilisation and revenue per employee will show whether companies are becoming more efficient while continuing to grow.

Q2 will not settle the debate over AI's economics in Indian IT. It should, however, give investors a clearer indication of whether AI activity is translating into revenue.