Indian IT once confidently walked the path it had paved for itself. There was growth driven by headcount expansion, steady demand ensured by low-cost delivery, and a sense of business predictability.
However, with artificial intelligence steadily reshaping the landscape, the industry now finds itself trying to sprint in shoes made for walking. This picture is hard to miss and stands out sharply when recent data is examined. AIM held conversations with industry analysts, who also support the narrative.
While the first quarter isn’t expected to bring major surprises, it confirms that a transition is underway. The old pace no longer fits the new terrain, and what companies overlooked before has become a pressing necessity.
The Numbers Speak
UnearthInsight founder Suhas Gaurav describes the Indian tech services sector as navigating a complex landscape marked by cautious optimism amid macroeconomic uncertainties and evolving client demands.
Engati co-founder and managing director Imtiaz Bellary and independent digital transformation advisor Viswanathan KS agree that external factors are significantly impacting Indian IT’s growth.
Gaurav notes that Q1 FY26 (April–June 2025) will see muted growth due to persistent global geopolitical headwinds, tariff uncertainty, the GCC boom, and the US economic slowdown, all of which are expected to impact discretionary tech spending.
UnearthInsight forecasts FY26 growth at 4–5%, with Q1 growth projected at 1–1.5% for the top 15 tech services firms, primarily driven by mid-tier players like Persistent, Cyient, and Coforge. Meanwhile, the top five IT services firms are expected to grow more slowly, at 0.8–1.2% quarter-on-quarter.
PL Capital anticipates a soft Q1 across the sector but retains Tata Consultancy Services (TCS) as its only “Buy”-rated stock, citing its relative stability.
While macro conditions have improved since March, the company said, deal momentum remains subdued. Tier-2 firms (annual revenues $1–5 billion) are expected to outperform due to steady, modest growth, whereas Tier-1 companies may see slight sequential declines.
PL Capital also warns that valuations are rich and upside limited, signalling a cautious outlook.
Credit rating agency ICRA has reaffirmed a stable outlook for Indian IT, forecasting 2–3% year-on-year revenue growth in US dollar terms for FY26. ICRA’s analysis, based on 15 leading IT companies representing about 60% of industry revenue, expects modest growth slightly lower than the 2.9% recorded in FY25.
The subdued momentum is largely attributed to US tariff uncertainties impacting IT budget allocations.
Viswanathan points out that Q1 is typically a slow operational quarter marked by organisational changes such as internal transfers and leadership reshuffles. Considering productivity pushes, cost pressures, AI adoption, and the rise of the GCC model, he expects Q1 results to improve over last year’s and anticipates Q2 to be stronger as well.
The Elephant in the Room
The critical issue influencing performance is Indian IT’s legacy challenges: heavy reliance on traditional headcount-based pricing, slow adoption of outcome-based contracts, and dependence on low-cost labour arbitrage. These factors limit agility and margin expansion in an AI-driven market.
Gaurav believes that while clients have shifted focus to emerging technologies like AI, generative AI, and agentic systems to transform tech stacks alongside cloud transformation as long-term growth levers, the supply side has not matched this enthusiasm.
“Indian tech services firms are still working on early-stage experiments and proof-of-concept AI/GenAI deals, so we don’t see significant AI/GenAI revenue announcements. Except for TCS, other firms remain under $50 million in AI-related revenues, often embedded within existing deals and thus hard to isolate,” he said.
Viswanathan noted that many companies were in the proof-of-concept phase for AI during Q1 and Q2 last year, but that phase is largely over. Companies are now adopting AI more broadly. Those sharply focused on AI and GenAI—especially those hiring talent with advanced coding and software skills—are likely to perform better this quarter and beyond.
He added that companies investing early in the GCC model are expected to fare better. “The number of RFPs for setting up GCCs is rising significantly, indicating increased spending on technology capabilities. Whether companies build fully in-house GCCs or partner with service providers, the trend towards GCC adoption is clear.”
Client Behaviour and What It Means for H2
Gaurav mentioned that, particularly in the US and BFSI sectors, clients tend to be cautious with their tech spending, especially on enterprise license implementations and long-term projects. “Currently, clients are focused on quick ROI deals in AI, GenAI, engineering, and infrastructure to sustain existing technology,” he explained.
When asked if AI monetisation is real or mostly marketing hype, Bellary said monetisation correlates directly with adoption. “Businesses adopting AI with strategic intent are seeing monetisation, while those resisting or superficially adopting it are missing out,” he affirmed.
Bellary recommends closely tracking AI revenue and Return on Capital Employed (ROCE) for AI businesses. “Companies showing positive trends in these metrics are recovering and growing faster than others,” he added.
Tier-2 Companies: Not Leading the AI Charge
Gaurav said tier-2 companies are not significantly ahead in AI adoption. They continue operating with traditional models and have not made substantial investments to become AI-first, just like tier-1 firms.
Their faster revenue growth is due to smaller size, focused industry verticals, and limited geographic presence—not AI pivoting.
“They often take on cost-optimisation deals at lower margins compared to tier-1 firms. Players like Persistent and Cyient serve niche verticals such as micro-insurance or mid-market segments. While tier-2 firms grow faster, their margins are not comparable,” he explained.
Indian IT Not Outcome-Based Yet
Gaurav bluntly stated that Indian IT firms are “yet to adopt outcome-based models and remain largely dependent on traditional headcount-based pricing.”
Despite external pressures, real change has been limited. “Meaningful shifts require investing in AI-enabled applications—a move agile startups and mid-sized firms are already making. Until then, Indian IT’s slow growth of around 1% per quarter is likely to continue,” he concluded.
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