Indian IT's Q2 Will Test the Economics of AI

Indian IT's Q2 earnings season is set to begin with deal pipelines holding up even as revenue growth remains subdued. Following a volatile August rally, the Nifty IT index gave up much of its gains in September as investors focused on how AI was changing the economics of the business. 

Generative AI is opening a new pool of work even as clients push IT vendors to pass some of the efficiency gains from existing services.

Tata Consultancy Services (TCS) is scheduled to announce its results on October 8, followed by HCLTech on October 12 and Infosys on October 23. Investors are looking past headline total contract values (TCV) and focus on how quickly those bookings convert into revenue. Large-cap IT companies are expected to report constant-currency sequential revenue growth ranging from -0.5% to 2.6% in Q2, according to Ventura Research.

Accenture's October 1 results pointed to steady demand. The IT services company reported Q4 revenue of $18.7 billion, up 7% year-on-year (YoY) in local currency, and new bookings of $22.2 billion.

“Accenture results show demand is muted but stable. As AI revenue mix improves, overall growth profile should improve [for Indian IT],” Piyush Pandey, Senior Vice President and Lead Analyst at Centrum India, tells AIM.

AI Revenue Is Real, but Small

AI revenue had already began appearing in company disclosures, but remained a small part of the overall business.

In Q1, TCS reported an annualised AI revenue run rate of $2.6 billion, up 13.6% QoQ. Infosys said AI revenue accounted for 8.2% of its revenue. HCLTech reported Advanced AI revenue of $171 million, up 62.1% YoY in constant currency.

The figures cannot be directly compared because each firm defines AI revenue differently. UnearthInsight's Q2 preview estimates AI-led revenue at less than 5% of industry revenue. It also notes that with almost every deal now incorporating AI in some form, companies were finding it harder to report AI revenue separately. 

UnearthInsight Founder and CEO Gaurav Vasu tells AIM that much of what Indian firms sell is still concentrated in services, implementation, and proofs of concept (PoCs). He argued that it limited short-term revenue when IT firms did not own the application through which enterprise data and transactions flowed.

“Native AI firms, Hyperscalers, Frontier AI labs and enterprise AI startups continue to take away larger part of client AI spends,” he notes.

Vasu says Indian and global IT services firms will need to build, sell or control AI applications to capture more of that spending.

Enterprise software vendors such as SAP and Oracle are also embedding AI directly into their products, allowing clients to buy some AI capabilities through existing software contracts rather than separate services engagements.

AI Is Making Existing Work Cheaper

The productivity gains from AI were already showing up inside IT services firms.

Anmol Garg, Senior Vice President and Lead Analyst at DAM Capital Advisors, says the productivity impact is currently larger than the revenue addition.

“The quantum of AI-led deflation remains higher than the AI-led revenues that these companies are getting,” he tells AIM. Garg calls AI “a headwind for the IT sector, at least for now”, with the scale more tilted towards productivity and efficiency discounts.

Wipro has already seen this effect inside its business. The tech company’s Chief Technology Officer Sandhya Arun told Reuters that its AI initiatives had created capacity equivalent to 20,000 employees, which Wipro was redeploying elsewhere in the business.

At Accenture, Chair and CEO Julie Sweet said on the October 1 earnings call that the company was “more than offsetting” the productivity it gave clients with new kinds of work and expanded scope.

Garg does not see the same offset at Indian firms yet.

An IT services company can deliver the same work with fewer hours. If the client captures that saving through lower pricing or reduced project scope, the vendor gets the productivity benefit without necessarily generating additional revenue.

Why Strong Deal Wins Aren't Lifting Q2 Growth

Total contract value (TCV) measures a contract's value over its lifetime. Revenue arrives as the work ramps up, which can take time.

Q1 illustrated the gap. TCS booked $9.5 billion in TCV and grew 0.4% QoQ in constant currency. HCLTech posted its highest-ever Q1 net new bookings, at $2.4 billion, and grew revenue 2.6% YoY in constant currency. Infosys trimmed the top of its FY27 guidance to 1.5% to 3.0%.

UnearthInsight expects another muted quarter, with Q2 no better than Q1 and no revival in client budgets yet. It expects bookings to remain strong, but revenue conversion to take longer because of long decision cycles and continued uncertainty around client spending.

It expects FY27 growth of 3% to 4%, largely through inorganic growth.

Garg expects TCS, Infosys, Wipro, HCLTech and Tech Mahindra to face more pressure than several mid-tier firms. Net-new work entering the market will remains low, he says, with companies mostly taking share from one another.

What Investors Will Watch in Q2

TCS's AI revenue run rate will be one of the key numbers to watch. It stood at $2.6 billion at the end of Q1. The focus will be on how quickly that figure grows relative to overall revenue, and whether last quarter's large bookings begin converting into revenue.

Garg says the rupee's depreciation is supporting margins. If that tailwind fades, the question will be whether companies can find other ways to protect margins. UnearthInsight expects slight margin improvement at select Tier-1 firms, including TCS, Infosys and HCLTech.

At HCLTech, guidance is likely to draw more attention. HCLTech guides for 1% to 4% YoY growth in constant currency for FY27. Garg expects it to narrow that range. UnearthInsight expects guidance to remain largely unchanged across the industry, with select firms raising the top end by about 0.5%.

For Infosys, AI revenue growth and guidance will be the key numbers. AI revenue made up 8.2% of its Q1 revenue. Garg expects it to cut its guidance again after July's trim. The next figure will provide another measure of how quickly that AI revenue share is growing.

UnearthInsight expects conditions to improve in FY28, forecasting about 6% growth, helped by mid-market expansion and the possibility that some enterprise spending shifts back toward traditional transformation as AI pilots encounter scaling and adoption problems.

For Indian IT firms, the question is increasingly how much of the value created by AI they can retain as those gains flow through existing contracts. The Q2 numbers will offer another read on that gap as AI revenue grows alongside the productivity and pricing pressure already visible across the sector.