IT companies are seeing a 3–3.5% decline in revenue: Kotak

Indian IT services companies are likely to face a sharper-than-expected revenue impact over the next two fiscal years as enterprises accelerate the adoption of artificial intelligence and automation tools. According to Kotak Institutional Equities, the sector could see a 3.0–3.5% revenue decline, higher than its earlier estimate of 2.0–3.0%. This revision reflects the faster pace at which clients are integrating AI into their operations, reducing dependence on traditional IT services. The brokerage has also lowered its earnings-per-share projections for FY2027 and FY2028 across the sector, factoring in this increased revenue deflation.

Despite the near-term pressure, the long-term outlook for the industry remains stable. Analysts believe that while overall technology spending will grow strongly due to generative AI, a significant share of this value will be captured by global AI leaders and hyperscalers rather than traditional service providers. This shift is expected to temporarily limit revenue growth for IT services firms.

Another brokerage, Nuvama, has projected a 2–4% revenue impact for IT vendors in FY2026, citing insights shared by HCLTech during an AI-focused industry summit. It noted that the nearly $300 billion Indian IT services industry is already operating in a deflationary environment, and this trend may persist for the next few quarters. However, it also highlighted that the situation could improve over time, with generative AI eventually creating new revenue opportunities that outweigh the initial losses.

Industry leaders maintain that the current phase represents a transition rather than a decline. According to NASSCOM, AI-related services revenue is expected to reach $10–12 billion by FY2026. Executives like Joseph Anantharaju of Happiest Minds Technologies emphasize that AI-led work—including data engineering, automation, and analytics—is increasingly becoming a significant component of new deals. The company has already raised its FY2027 growth forecast to 12.5%, driven by its AI-first strategy and expanding digital capabilities.

Similarly, Samir Dhir of Sonata Software pointed out that AI is rapidly being embedded into traditional IT contracts, especially in sectors like BFSI and healthcare. As a result, the distinction between AI-specific deals and broader IT engagements is expected to blur, with AI becoming a core part of overall solution delivery.

While AI adoption is improving efficiency levels by an estimated 15–18%, it is also reshaping pricing models. Traditional headcount-driven revenue may come under pressure, but specialized AI skills are commanding a premium of 30–40%. This shift is expected to help IT firms offset some of the revenue compression through higher-value services.

Reflecting this evolving outlook, Nuvama has upgraded its ratings on several major IT stocks, including Wipro and Tech Mahindra, along with HCLTech and Hexaware. Despite recent market corrections driven by fears of AI disruption, analysts now see long-term value in companies that successfully adapt to the AI-driven transformation.