Indian IT firms see mixed earnings as AI reshapes market dynamics

The Nifty IT index, after a 17% rise in October, fell about 2% in early November, even as broader Indian indices gained on foreign-fund inflows ahead of Diwali. Mid-tier IT firms outperformed larger peers in the September quarter, with average sequential revenue growth of roughly 5.4% for tier-2 companies versus 1.1% for tier-1 firms, according to Choice Institutional Equities. Coforge led the mid-tier group with 10.9% growth, followed by Persistent Systems at 7.8%, while Tech Mahindra and HCLTech were the top performers among the larger firms.

Despite healthier deal bookings, revenue conversion remains slow because projects are being phased in, ramp-ups are staggered and client decision cycles have lengthened. Short-term AI engagements, typically lasting one to two quarters, also limit the visibility that traditionally comes from multi-year contracts, Choice noted.

The sector faces pricing pressure as enterprises adopt AI to boost productivity and cut costs. Kotak Institutional Equities estimates a gross margin deflation of about 7% and a net deflation of 3.5% as clients negotiate larger shares of productivity savings in contract renewals. Sandeep Gogia, managing director and co-head of investment banking at Equirus Capital, said the push for AI-related returns and concerns over safety and token-cost optimisation could open opportunities in data engineering, application modernisation, cloud migration and cybersecurity. He added, "> Integration of systems of records and data systems with systems of intelligence and AI models is not plug and play."

Operational efficiency and cost discipline have helped offset wage and delivery pressures, but margin performance remains uneven. Kotak expects margins at large IT firms to stay broadly stable, aided partly by rupee depreciation, while pricing pressure and AI investment costs could weigh on profitability. The firm also projects Infosys to lower its FY27 revenue growth guidance to 1.5%-2.5%.