Kotak Institutional Equities forecasts a larger-than-expected 3.0-3.5% revenue decline for Indian IT firms over the next two fiscal years due to accelerated AI and automation adoption, revising down its earnings estimates. While near-term revenue compression is expected, analysts and brokerages like Nuvama believe the industry's long-term relevance remains intact, anticipating that new GenAI opportunities will eventually offset the deflationary impact.
IT companies acknowledge short-term pressure but see AI as a gateway to larger digital transformation deals, embedding it into traditional contracts and expecting it to drive future growth. Firms like Happiest Minds are raising growth forecasts based on AI strategies, and Nuvama notes that new AI capabilities can command significantly higher billing rates, leading it to upgrade ratings for several major IT stocks.
The main topics covered are the revised financial impact forecasts on the Indian IT sector from AI adoption, the industry's strategic response to the shift, and the contrasting near-term challenges versus long-term opportunities presented by generative AI.
Indian IT service providers could face a 3.0-3.5% fall in revenue in the next two fiscal years, compared with the earlier estimate for a 2.0-3.0% hit, because of enterprises adopting artificial intelligence tools and automation faster than previously expected, according to Kotak Institutional Equities. The brokerage, however, predicts the industryâs long-term relevance to remain intact.
Analysts at Kotak also cut their fiscal 2027 and 2028 earnings-per-share estimates for companies across the IT industry, factoring in the revised revenue deflation rate.
âWhile we expect robust overall technology spending growth in the next few years, driven by increased Gen AI adoption, we expect a larger portion of the benefit to be captured by frontier labs and hyperscalers, with a far smaller component flowing through to services,â the brokerage said in a note dated March 4.
Another brokerage, Nuvama, cited figures given by HCLTech alongside the AI Impact Summit last month to predict a 2-4% revenue impact for IT services vendors in FY26 from the adoption of generative AI.
Nuvama, however, noted that the near-$300 billion industry was already operating in a deflationary environment and said it would benefit in the long term.
âWe estimate this revenue compression shall continue to affect the revenue growth of Indian IT companies over the next few quarters,â it said in a March 10 note. âGradually, this deflation should reduce, post-which we believe it shall reach an inflection point when the net new opportunity from GenAI would more than mitigate the deflationary impact."
IT firms see opportunities
Technology service providers insisted that while short-term deflation is a market reality, AI-augmented work will eventually create opportunities that will offset the revenue loss. According to Nasscomâs annual strategic review, AI services revenue for IT companies is pegged at $10-12 billion for FY26.
âWhile GenAI revenues would form a small portion of deals signed, our experience has been that AI and AI-led revenues (which comprise data engineering, automation and related work) can form a significant portion of the new deals,â said Joseph Anantharaju, chief executive of Happiest Minds Technologies.
The company raised its FY27 growth expectation to 12.5%, up from 10% earlier, anticipating that its âAI-Firstâ strategy and broader portfolio of initiatives will generate traction. Its shares closed 17.6% higher at Rs 400.45 Tuesday on the National Stock Exchange after the guidance revision.
AI deals are a gateway to larger digital transformation and re-engineering programmes across cloud, cybersecurity, digital engineering and industry-specific modernisations, Anantharaju said. âWe are already seeing AI embedded across traditional contracts, especially in BFSI and healthcare, which means the distinction between âAI dealsâ and âIT dealsâ will blur quickly.â
As AI tools mature, clientsâ expectations of translating the efficiency to lower costs or faster delivery increase. For IT providers that embrace this shift, the result is typically higher throughput and larger transformation programmes, said Samir Dhir, CEO and managing director of Sonata Software. âConsequently, while pure-play AI deals may appear small in number today, AI-driven capabilities are increasingly becoming a core component of overall solution architectures,â he said.
Beyond opening up new tech spending areas, analysts at Nuvama said, the increase in efficiency levels due to AI deployments, between 15% and 18%, would help command higher billing rates. While some legacy headcount-based revenue may face pressure, new AI capabilities command higher billing rates, an around 30-40% premium for certain new skills, the brokerage said in a note.
The brokerage upgraded the ratings for at least four stocks, HCLTech, Wipro, Tech Mahindra and Hexaware, with all the top ten service providers under its coverage now having a 'Buy' rating. These stocks had seen a major downturn in recent weeks amid fears that AI would disrupt their business.
Analysts at Kotak also cut their fiscal 2027 and 2028 earnings-per-share estimates for companies across the IT industry, factoring in the revised revenue deflation rate.
âWhile we expect robust overall technology spending growth in the next few years, driven by increased Gen AI adoption, we expect a larger portion of the benefit to be captured by frontier labs and hyperscalers, with a far smaller component flowing through to services,â the brokerage said in a note dated March 4.
Another brokerage, Nuvama, cited figures given by HCLTech alongside the AI Impact Summit last month to predict a 2-4% revenue impact for IT services vendors in FY26 from the adoption of generative AI.
Nuvama, however, noted that the near-$300 billion industry was already operating in a deflationary environment and said it would benefit in the long term.
âWe estimate this revenue compression shall continue to affect the revenue growth of Indian IT companies over the next few quarters,â it said in a March 10 note. âGradually, this deflation should reduce, post-which we believe it shall reach an inflection point when the net new opportunity from GenAI would more than mitigate the deflationary impact."
IT firms see opportunities
Technology service providers insisted that while short-term deflation is a market reality, AI-augmented work will eventually create opportunities that will offset the revenue loss. According to Nasscomâs annual strategic review, AI services revenue for IT companies is pegged at $10-12 billion for FY26.
âWhile GenAI revenues would form a small portion of deals signed, our experience has been that AI and AI-led revenues (which comprise data engineering, automation and related work) can form a significant portion of the new deals,â said Joseph Anantharaju, chief executive of Happiest Minds Technologies.
The company raised its FY27 growth expectation to 12.5%, up from 10% earlier, anticipating that its âAI-Firstâ strategy and broader portfolio of initiatives will generate traction. Its shares closed 17.6% higher at Rs 400.45 Tuesday on the National Stock Exchange after the guidance revision.
AI deals are a gateway to larger digital transformation and re-engineering programmes across cloud, cybersecurity, digital engineering and industry-specific modernisations, Anantharaju said. âWe are already seeing AI embedded across traditional contracts, especially in BFSI and healthcare, which means the distinction between âAI dealsâ and âIT dealsâ will blur quickly.â
As AI tools mature, clientsâ expectations of translating the efficiency to lower costs or faster delivery increase. For IT providers that embrace this shift, the result is typically higher throughput and larger transformation programmes, said Samir Dhir, CEO and managing director of Sonata Software. âConsequently, while pure-play AI deals may appear small in number today, AI-driven capabilities are increasingly becoming a core component of overall solution architectures,â he said.
Beyond opening up new tech spending areas, analysts at Nuvama said, the increase in efficiency levels due to AI deployments, between 15% and 18%, would help command higher billing rates. While some legacy headcount-based revenue may face pressure, new AI capabilities command higher billing rates, an around 30-40% premium for certain new skills, the brokerage said in a note.
The brokerage upgraded the ratings for at least four stocks, HCLTech, Wipro, Tech Mahindra and Hexaware, with all the top ten service providers under its coverage now having a 'Buy' rating. These stocks had seen a major downturn in recent weeks amid fears that AI would disrupt their business.
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