New Delhi [India], October 2 (ANI): Tier-2 IT companies are expected to outperform larger industry players in the second quarter of FY27, even as the sector faces challenges from geopolitical tensions, weak macroeconomic conditions and the growing impact of generative artificial intelligence (Gen-AI), according to a report by Nuvama.

The report said the overall demand environment remained largely stable during the quarter, but weakened in September amid rising geopolitical uncertainties.

'The demand environment has largely remained stable with some weakness in Sep-26 due to a worsening geopolitical environment,' the report said.

Nuvama expects management commentary during the earnings season to highlight challenges arising from geopolitics, a weak macroeconomic environment and the potential impact of Gen-AI.

The IT index has declined 26 per cent over the past nine months, mainly due to concerns around platform-led Gen-AI disruption and uncertainties related to the Gulf region.

However, Nuvama maintained a positive view on the IT services sector over the medium to long term.

'We continue to believe the IT Services model is here to stay and the Gen-AI disruption would only lead to bigger opportunities for them,' the report said.

The brokerage expects tier-2 companies to continue their stronger performance in the quarter. Persistent Systems is estimated to lead the segment with 6.5 per cent quarter-on-quarter (QoQ) growth in constant currency (CC), followed by Mphasis at 3.1 per cent and Hexaware at 2.5 per cent.

Nuvama also expects margins to improve across most IT companies. The brokerage expects several companies to revise their guidance. Margin guidance, however, is expected to remain unchanged across companies.

Nuvama has also revised its USD/INR assumption to 95 from 93 and rolled forward its valuations based on average FY28-29 price-to-earnings multiples.

The brokerage said near-term volatility is likely to continue, while maintaining a positive outlook on the IT services sector over the medium to long term. (ANI)