Indian IT firms face structural headwinds, Gen AI yet to deliver: HSBC India

Indian IT services firms are unlikely to return to their historical double-digit growth rates as structural challenges weigh on the industry, according to Yogesh Aggarwal, Head of Equity Research at HSBC India. While the sector could see a cyclical recovery in the near term, from a medium to long-term perspective, growth will likely stabilise at 4-5%, he said in an interaction with ET Now. Further, the rupee has depreciated by about 2.5-3% over the last 25 years, contributing to overall EPS growth and supporting this expectation for medium to long-term investors.

Despite strong second-quarter earnings in the US—the largest market for Indian IT—technology spending has not picked up meaningfully. Aggarwal attributed this to a mix of tariff-related uncertainty, improved productivity from cloud adoption, and the early deflationary effects of artificial intelligence (AI). “There are push-and-pull factors at play. Hopefully, spending should pick up over the next few quarters as rate cuts come through,” he said.

Basket approach in midcap IT


Some mid-sized IT companies are seeing growth rates of 0-25%, offering selective investment opportunities, but there will also be companies facing specific challenges. A diversified investment approach is advisable in IT midcaps. In the larger tier, growth rates are uniform at around 2-3%, with companies trading at similar valuations. Considering cash flows and dividend yields, current valuations appear sustainable, indicating minimal downside risk.

HSBC expects the IT industry to return to 5–6% growth next year, after two to three years of muted performance. Over the medium term, however, Aggarwal sees structural limits. “The industry is now $230–240 billion in size, making rapid expansion more difficult. Growth is increasingly tied to US and European macro trends rather than market penetration. A 4–5% growth rate in constant currency, plus rupee depreciation benefits, is a fair assumption for investors,” he explained.


Gen AI Impact

Aggarwal highlighted the dual impact of generative AI: deflationary for existing IT work but accretive in the long run as enterprises adopt AI-led solutions. “POCs are happening, but enterprise-scale adoption will take time given safety and compliance concerns. Meanwhile, the deflationary impact is already being felt,” he said.

Valuations, though high compared with global peers, are reasonable in the context of historical averages, Nifty multiples, and sector cash flows, Aggarwal noted. He sees limited downside risk and suggested a basket approach for mid-tier IT, given performance divergence, while large-cap valuations have converged.

“Growth differences among large players are narrow, but valuations have evened out and look sustainable,” he said, adding that selective opportunities exist in this sector.