AI disruption hits India's core IT revenue model, but new money-making avenues emerge

Between 2020 and 2024, Indian Information Technology (IT) companies thrived on a surge in global technology spending, fuelled by cloud migration and digital transformation. The momentum slowed in 2025 as demand uncertainty weighed on performance. Earnings visibility weakened, with many firms reporting softer revenue growth and issuing cautious guidance. Deal closures were delayed or priced more aggressively, while wage inflation and higher onsite costs squeezed margins.

Geopolitical tensions further dampened risk appetite, leading to reduced discretionary technology spending among major US and European Union (EU) clients. The slowdown is also reflected in equity market performance. The Nifty IT index emerged as the second-worst performer (after Nifty realty index) among the nine Nifty sectoral indices in 2025, declining 12.6%. In contrast, the broader Nifty 500 index posted a gain of 6.2%, underscoring the sector’s relative weakness.

The challenges have carried into 2026, intensified by mounting concerns over an AI (Artificial Intelligence)-driven structural transformation in the industry. The benchmark IT index plunged 20.7% year-to-date, dramatically underperforming the Nifty 500 index, which recorded a decline of 4.5%. The returns are based on 2 March 2026 values.

AI threat: real or overstated?

The key risk due to AI transition is a fundamental shift in IT companies’ revenue models. Traditional streams such as application development and maintenance are giving way to more complex, high-value areas including platform engineering, AI implementation, and agentic delivery models. This evolution creates both the disruption and provide new opportunities, but it also raises uncertainty about how firms will adapt.

IT loses gleam

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Deflationary risks

Several brokerages have flagged deflationary risks (or downward pressure on prices and revenue per unit) to the sector due to AI. Prabhudas Lilladher, citing industry experts, estimates a 20-50% deflationary impact on traditional IT services as AI reduces process complexity and turnaround times.

Motilal Oswal projects a potential 10% cut in earnings per share for large-cap IT firms if deflation materialises rapidly, though a gradual transition could allow for cyclical recovery. However, the report asserts that it is difficult to determine whether AI eventually renders IT services obsolete over the long term.

Jefferies highlights sharp revenue deflation in application managed services, which account for 22-45% of IT revenues. As client engagements shift toward advisory and implementation, revenue growth could become more cyclical, demanding an overhaul of talent strategies and operating models.

Terminal growth concerns

AI’s ability to automate code generation, testing, maintenance, and infrastructure management reduces human effort per project. This is expected to lower billing rates and revenue per employee, structurally reducing long-term growth and returns on invested capital. Lower terminal growth rates could erode valuations and hinder rerating potential.

Street bets on leaders

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AI opportunities

Despite the risks, AI opens new revenue pools. Legacy code modernisation—upgrading outdated systems for cloud, AI, and security compatibility—represents a $600 billion opportunity for Indian IT firms, according to Elara Capital. Other emerging areas include AI infrastructure, enterprise AI applications and automation ecosystems. While margins may be lower, these can offset pressure on traditional services. Experts say AI is not an existential threat. Firms investing in AI capabilities and consulting are better placed to defend margins. Growth may be slower and more selective than the past decade’s volumeled expansion, but IT remains a structural export engine for India.

Anirudh Garg, Partner and Fund Manager, INVasset PMS believes that in the long term, IT growth will be more productivity-driven. Demand for services in cloud, data, analytics and legacy system modernisation is expected to rise as clients prepare for AI adoption. Hitesh Jain, Fund Manager at Invesco Mutual Fund, believes companies that quickly reskill their workforce and are willing to cannibalise existing businesses could gain market share.

Dec 2025 quarter performance

Despite challenges, the sector reported steady revenue growth in Q3 FY2025-26, supported by demand for digital and cloud services and a healthy deal pipeline. Discretionary spending in the US and EU remained cautious, but BFSI (banking, financial services and insurance) and retail showed early recovery signs.

Large-cap IT firms demonstrated relative resilience due to diversified client bases and stronger balance sheets, while mid- and small-cap players showed sharper volatility due to vertical concentration. Deal wins were skewed toward smaller, AI-led transformation mandates rather than large, multi-year discretionary contracts.

Among large players, Tata Consultancy Services, Infosys and LTIMindtree reported steady performance, with year-on-year revenue growth of 4.9%, 8.9% and 11.5%, respectively. HCLTech delivered stronger growth at 13.3%. Infosys and HCLTech also raised their FY2025-26 revenue guidance, signalling confidence in business momentum. In the midcap space, Coforge and Persistent Systems reported year-on-year revenue growth of 28% and 24%, driven by strong execution and faster deal conversions. These growth rates are in rupee terms.

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Investor approach

Despite earnings uncertainty, sector fundamentals remain stable, with healthy cash flows and no balance sheet concerns. However, valuations have risen relative to weaker growth visibility. Tushar Badjate, Director, Badjate Stock & Shares, says IT is no longer a blanket defensive bet but not a sector to abandon. He advises selective accumulation in high-quality firms with strong cash flows, global exposure and clear AI strategies. Garg adds that exposure should match risk appetite. Long-term investors can gradually accumulate companies showing an AI pivot, consulting strength and strong order books. The sector, he says, is transitioning— not collapsing—but requires patience and selectivity. Looking at stock recommendations, Infosys and Tata Consultancy Services has the highest number of buy ratings in the large cap IT space; Coforge has the highest number of buy ratings in the mid cap space. These analyst ratings are compiled by Reuters-Refinitiv database.