Over-hiring following the pandemic years has given way to unprecedented layoffs, clients in key markets such as the United States remain reluctant to spend on discretionary IT services, and artificial intelligence threatens to upend the sector’s core business model.
And yet, India’s mid-size IT companies rather than the Big Five seem closer to navigating the AI disruption and global uncertainties. Investors in India’s IT services sector need to closely watch the dynamics unleashed by these two factors in particular.
US President Donald Trump’s trade war could hurt global economic growth, indirectly affecting India’s IT services sector, which in FY24 accounted for 48% of the country’s services exports.
As for AI, its potential impact on India’s IT services sector is unclear. IT firms that are agile and can innovate rapidly could see productivity benefits, but companies unable to scale up their AI operations quickly enough could see business slowing or even moving away.
Following this confluence of unfortunate events over the last couple of years, India’s IT services industry registered another period of subdued growth in the first quarter of fiscal year 2025-26. The sector is projected to grow at just 3% in FY26, unchanged from the previous fiscal year.
The nervousness is palpable in the Nifty IT index, which has sunk 20% this year even as the Nifty 50 has gained 5% despite global turbulence. Over a five-year period, the Nifty IT has underperformed the Nifty, gaining 92% versus the benchmark index’s near 120% surge.
Is the sector still a must-have category for investors? It has emerged from previous macroeconomic and technology challenges stronger, and pockets of resilience are still evident. But will AI prove to be the end of the line?
The resilient midcaps
Midsize companies have been leading India’s IT sector amid the ongoing turmoil by being more agile in adopting AI and passing on some of the productivity and cost benefits to clients.
Typically, during slow periods, clients prefer to consolidate their IT vendors, which benefits larger firms. But in the current environment of uncertainty, clients are opting for smaller and shorter deals, and preferring outcome-based rather than resource-based pricing.
Midcap IT firms are also benefiting from their niche and specialized areas of operation, as clients opt for specialist firms offering stronger executive focus and commitment over generalist IT firms.
While Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, and Wipro Ltd generate annual revenue exceeding $10 billion, Tech Mahindra Ltd, LTIMindtree Ltd, Mphasis Ltd, and Coforge Ltd post revenue between $1 billion and $10 billion. Persistent Systems Ltd, Hexaware Technologies Ltd, and Firstsource Solutions Ltd are the latest entrants into India’s midcap IT club.
In FY25, TCS, Infosys, and HCL Tech reported revenue growth of about 4%, while Wipro reported a second straight year of decline. In the first quarter of FY26, even as Wipro continued with its downward trend, TCS too slipped in terms of constant-currency revenue growth. Tech Mahindra’s revenue also declined.
Midcap IT services companies have fared better. Coforge’s revenue, for instance, grew 32% in FY25. Projected growth for midcap IT firms is higher as well. Midcap IT firms also hired more than their largecap counterparts in FY25. But it is important to note that notwithstanding the growth-lag, the larger companies still lead on margins.
Turnaround stories
Despite their declining revenues, Tech Mahindra and Wipro reported sharp improvement in margins in FY25.
Whenever the sectoral climate turns favourable, if the turnaround persists, stocks that corrected significantly in recent years should return to being investor favourites. Wipro is trading at less than 19 times its trailing 12-month earnings, reflecting a discount of more than 30% over the Indian IT sector.
Wipro has struggled for several years now, bogged by frequent management churn, high attrition, and aggressive inorganic expansion that weighed on margins. Yet, its rate of revenue decline slowed from 4.4% in FY24 to 2.3% in FY25.
Wipro was also responsible for a third of the total net headcount reduction in India’s IT services industry in FY24. After slashing its headcount by more than 25,000 that year, Wipro added only about 700 in FY25.
That said, hopes for Wipro have soared on its new management’s approach of limiting the churn in senior leadership. They are also focusing on improving relationships with key clients. Wipro is also doubling down on large deals and emerging themes such as data and analytics, cloud computing, and AI.
The company’s margin expanded by 90 basis points (bps) to 17.1% in FY25. The first quarter of FY26 saw its margin expand further despite a flat topline. Deal-bookings surged by more than 50% to $4.97 billion, while large deal-wins more than doubled to $2.67 billion.
Nevertheless, given the uncertainty around these themes and Wipro’s recent track record, investors should exercise caution before counting on the company’s recovery. The stock has underperformed the sector in the previous five years.
Tech Mahindra is a different story. It is largely a case of poor timing. The company had attempted to expand into new product lines and geographies but that did not work well due to industry headwinds.
Closures of these expansions hurt Tech Mahindra’s operating margin, pulling it down to 6.1% in FY24—the lowest among India’s largecap and midcap IT services companies.
The company’s new leadership has its task cut out. Aiming to scale up growth and expand the operating margin to 15% by FY27, management has focused on large deals and cost optimization. This has paid off so far. The company secured deals worth $2.7 billion in total contract value in FY25, up from $1.8 billion in the previous fiscal year.
Following a 4.7% decline in revenue in FY24, continued strain in its mainstay communications segment, and despite a mere 17% exposure to the robust banking, financial services, and insurance (BFSI) segment, Tech Mahindra managed to close FY25 with 0.3% growth. Its operating margin expanded by 360 basis points.
Its numbers improved in the first quarter of FY26. Despite a modest 2.65% growth in operating revenue over the same quarter last year, margin expansion led to a 33.9% year-on-year growth in consolidated net profit. Tech Mahindra also reported a 44% increase in deal wins over the previous 12 months, primarily focused on the BFSI and communications segments.
Infosys and TCS, too, have lagged in terms of growth in recent years. Their valuations reflect this slowdown, and the stocks can be considered attractive opportunities if investors see signs of growth rebounding. Infosys’s 7.5% topline growth and 8.6% profit growth in the April-June quarter offers hope.
Hits and misses
Infosys, Wipro, and LTIMindtree derive 60-65% of their revenue from discretionary IT spending by clients. This leaves them vulnerable to sharper slowdowns. On the flip side, they stand to benefit from macroeconomic recoveries.
This is one of the reasons that despite having significant exposure to the BFSI segment, which recovered during FY25, LTIMindtree saw only a moderate pickup in revenue growth—from 4.2% in FY24 to 5% in FY25.
Of course, the cultural mismatch overhang from the merger between L&T Infotech and Mindtree weighed on growth. Senior leadership exits after the appointment of LTIMindtree’s new chief executive played a role as well.
Meanwhile, the passthrough of automation and AI-led cost benefits to clients led to a 120 bps compression in margin in FY25. Things looked up in the latest first quarter, though, with LTIMindtree’s topline and bottomline clocking around 11% year-on-year growth.
Another IT company worth special mention is Persistent Systems. It has delivered a massive compound annual growth rate (CAGR) of 85% over five years. Investor enthusiasm for the stock stems from the company’s strong products and platforms business, which have proved resilient against fickle discretionary spending and the global uncertainty.
Persistent Systems continued to win deals even as the broader industry struggled. Total contract value expanded 15% from $1.8 billion in FY24 to $2.1 billion in FY25.
The company has no plans to accelerate hiring, which is expected to work favourably for its margins. But a tepid market reaction to its first-quarter earnings suggest investor expectations may have run ahead of the stock’s fundamentals.
Despite registering 19% growth in constant-currency revenue and 35% year-on-year growth in profit after tax, Persistent Systems undershot expectations and the stock corrected by 7% following the announcement.
BFSI to the rescue
When the US banking sector turned cautious after the collapse of a number of small banks, its discretionary spending on technology shrunk. This affected revenue growth for Indian IT companies, which derive a bulk of their revenues from the US BFSI sector.
But amid the economic uncertainty in the US, India IT’s primary market, BFSI’s resilience has been an exception. Most other segments, especially retail, airlines, hospitality, and packaged goods, have been adversely affected.
While BFSI exposure for India’s largecap and midcap IT services companies averages about 35%, Mphasis, Coforge, and LTIMindtree have above-average exposure to the segment.
Mphasis derived 62% of its revenue from the BFSI sector in FY24. The segment was one of the primary drivers for the company’s 6.5% revenue decline that year.
The tables turned in FY25, when BFSI was the only sector that almost invariably supported IT revenue growth during the fiscal year.
On cue, Mphasis saw a turnaround in FY25 with 4.6% revenue growth in constant-currency terms. For the first quarter of FY26, the company reported 9.1% year-on-year growth in operating revenue, and even faster 13.5% growth in profit after tax.
Coforge, which also has a high exposure to the BFSI segment, saw revenue growth surge from 13.3% in FY24 to 32% in FY25.
At the other end of the spectrum are HCL Tech and Tech Mahindra. These companies derive 17-21% of their revenue from the BFSI segment but haven’t been able to capitalize on it.
For Tech Mahindra, stress in its mainstay communications segment weighed on revenue growth in FY25. As for HCL Tech, the company has fallen behind on deal ramp-ups.
As a large project in HCL Tech’s retail business approached completion, its Verizon deal was scaled down. A 5% decline in total contract value in FY25 cast a shadow on the company’s revenue visibility.
In the first quarter of FY26, partly owing to a one-time impact from a client’s bankruptcy, HCL Tech reported an almost 10% decline in net profit despite clocking healthy 8% growth in its topline.
Among other business segments for India’s IT services sector, industrials and manufacturing, particularly automotive, have also suffered due to decision-making delays. Energy and utilities helped lift IT revenues in the first half of FY25, but in the second half, owing to concerns on global growth, the segment saw a decline in IT spending.
The healthcare and lifesciences segment also held back on IT spending amid tariff threats and guidelines on pricing control of patented drugs in the US.
AI and other pivots
At the core of the disruption in India’s IT services sector is artificial intelligence.
Demand for AI, data and analytics, cloud computing, and IoT services has seen phenomenal growth in recent years, and clients are outsourcing these requirements to cost-effective and geographically diversified IT providers rather than building in-house teams.
Adoption of cloud-based applications picked up pace following the pandemic years as businesses sought to keep a lid on hardware costs. Rising digitalization drove up investments in cybersecurity.
And while AI is still nascent in terms of revenue contribution, it is expected to emerge as a double-edged sword for IT demand.
According to a report by Icra Ltd, generative AI delivers only $5-10 million of revenue per project, although the technology has the potential to generate higher revenues eventually. Besides, AI adoption has been limited by outdated enterprise resource planning platforms due to insufficient data for training AI models.
Also, clients have been moving previously outsourced IT services inhouse as AI has made it possible for certain tasks to be handled more quickly by smaller teams. Clients are also demanding that IT companies pass on AI-driven cost benefits to them.
This is resulting in shrinking margins for IT services firms, especially for providers of business process outsourcing (BPO) services. Business processes such as customer service are highly amenable to being replaced by AI.
Over time, as AI develops to cover a wider range of business services, other IT segments will have to follow suit—adopt AI to reduce costs, and pass on some of the cost benefits to clients.
As traditionally pyramidal hierarchies at IT services companies give way to solutions-focused and project-centered teams, more middle management roles are expected to become redundant.
Amid US crisis, Europe extends support
Europe, which contributes about a fourth of the Indian IT services sector’s revenue, has picked up some of the slack in IT spending in the US. Between 2023 and 2025, the US economy’s growth slowed from 2.9% to 1.7%. The European Union’s economy remained flat in 2023, accelerated to 1% in 2024, and is expected to grow 1.2% this year.
Meanwhile, order pipelines that were slow to convert in FY24 finally made their way into revenues in FY25. This explains why, despite policy uncertainty and a slowdown in the US, most Indian IT firms saw revenue growth picking up speed in FY25.
While India’s IT services sector is not under the purview of US tariffs, considering that more than half of Indian IT majors’ revenue is derived from the US, a slowdown there will affect the sector indirectly. The International Monetary Fund has slashed its projection for the US’s economic growth in 2025 from 2.7% to 1.8%.
Of course, with the US now striking agreements with major economies and finalizing tariffs, the uncertainty may wear out. But if India is unable to reach an acceptable middle ground in its trade talks with the US, it may affect immigration policies and, by extension, the IT sector.
Also, Trump’s new Department of Government Efficiency, created to cut expenses deemed unnecessary, could affect IT spending by US federal agencies, in turn affecting the Indian IT companies that cater to such agencies.
L&T Technology, which derives 55% of its business from North America and 18% from Europe, saw its revenue growth lose steam from 17.9% in FY24 to 8.9% in FY25. So, despite a 21% year-on-year growth in revenue from Europe, overall growth was muted because of 2.6% growth in US revenue.
About 63% of L&T Technology’s business flows from engineering, research, and development (ER&D) services catering to automotive and sustainability segments, which have suffered under policy uncertainty in the US. The company also witnessed the steepest margin contraction during FY25.
However, more recently, IT spending in Europe has also taken a backseat because of a slowdown plaguing the largest European economies. Monetary easing and increased government capital expenditure to spur growth could help boost IT spending by European companies.
Other pockets of resilience
India’s IT sector can be categorized into three classes based on the type of services provided—ER&D, BPO, and routine IT services.
ER&D involves specialized IT support for product and process development across industries. BPO service providers cater to a client’s outsourced ancillary business processes such as human resources, accounting, and customer service. And in routine IT services, clients are provided support related to IT infrastructure, business operations management, and general cost-savings.
ER&D requires deeper domain expertise, stronger track record, and higher onshoring—sending experts at client locations to handle the processes. This makes ER&D typically stickier than routine IT services, and more resilient to competition and industry headwinds.
Large and midsize IT services companies have traditionally focused on routine IT and BPO services, but are pivoting towards ER&D. But this is a crowded segment with both specialised companies and clients’ in-house ER&D teams adding to the competition.
The global business ER&D segment expanded at a 9% CAGR between 2020 and 2023, a pace it’s expected to maintain through the next five years, according to a report by JM Financial.
Demand for digital engineering solutions such as cloud computing, AI, internet of things, and blockchain grew at a CAGR of 8.4% between 2020 and 2024, and is expected to accelerate to 10.5% over the next five years.
Driven by increasing demand for such digital engineering solutions, particularly in the automotive, energy, and medtech segments, ER&D growth in India is expected to outpace global growth.
India’s ER&D segment is projected to grow at a CAGR of 21% over the next five years—from $45 billion, or 17% of global ER&D business, in 2023, to $150 billion, or 22% of the global business, by 2030.
Pulling in opposite directions
According to Porter’s Five Forces model, factors that shape an industry include competition, supplier power, buyer power, threat of substitution, and the threat of new entrants.
In India’s IT services sector, competition, and buyer and supplier forces vary depending on the segment. Competition tends to be higher in traditional IT and BPO services, which provide general IT services and have low barriers to entry.
Also, clients, even if they have IT teams for handling specific requirements, are increasingly outsourcing to geographically diversified and cost-efficient ER&D providers to be able to take their products or services to the market faster.
While global IT budgets expanded at a CAGR of 6% between 2020 and 2024, outsourced IT spending grew at a faster clip of more than 7%, according to JM Financial.
When it comes to supplier power, India has a large supply of general IT talent, resulting in subdued supplier power for traditional IT services. But in emerging themes such as AI, the IT talent is limited so far.
So, the supplier—India’s IT talent pool—holds the cards when it comes to AI-focused projects. Since India has limited AI talent, the AI employee pool has higher supplier power than the general IT employee pool.
Buyer power is lower in the ER&D segment, where niche and specialized services provided in complex projects make it difficult for clients to switch over to competitors or substitutes.
In traditional IT services, however, buyer power is significant. Client concentration towards certain large IT majors in the US has led to higher buyer power. For instance, Microsoft’s recent spending cuts and its AI focus threaten to thwart the growth of Indian IT services companies.
This is because Microsoft outsources some of its projects to India and is among the largest customers for many Indian IT firms. But Microsoft cutting back on costs and using AI to take its projects inhouse threatens growth for its Indian vendors.
The threat of substitution and new entrants in the IT sector primarily comes from global capability centers (GCCs), which have emerged as stiff competition to traditional IT companies. GCCs allow clients to outsource their IT requirements to their own teams overseas, helping them save significantly on employee costs.
Companies worldwide spent $60-75 billion on GCCs in FY23, according to a report by IDBI Capital. Of these, 60% are housed in India and China. India hosts more than 85% of the world’s top 50 ER&D spenders.
While India’s top IT companies registered a net headcount reduction of around 70,000 in FY24, net headcount, including GCCs, saw an increase of 60,000 employees during the year.
Historically concentrated in tier-1 cities, GCCs are now extending into smaller cities as well.
Of course, there are plans by IT majors to outsource their projects (or at least parts of their projects) to GCCs. This should allow some of the benefits of GCC growth to spill over to traditional IT companies as GCCs have a more efficient way of working with project-centered teams and outcome-led pricing.
That’s how GCCs have been more price-competitive. IT majors plan to offer competitive pricing by outsourcing their projects to the more-efficient GCCs.
Deals to drive growth
India’s midcap IT services companies not only led revenue growth in FY25, they also managed to scale up significantly in deal wins, which improves their revenue visibility and growth prospects as compared with their largecap peers.
Backed by high BFSI exposure as well as its acquisition of Cigniti Technologies, Coforge led on deal wins. Compared with a total contract value of less than $2 billion in FY24, FY25 saw the company securing deals worth almost $3.5 billion.
For Tech Mahindra, too, management’s focus on large deals has paid off.
Wipro shows promise as well. The company signed large deals worth $1.2 billion in the fourth quarter of FY24, and $1.8 billion in Q4 FY25.
For Infosys, the share of deal renewals in net new deals dropped from 56% in Q4 FY24 to 37% in Q4 FY25. As a result, its total contract value almost halved from $4.5 billion to $2.6 billion during the period.
Both companies have registered significant improvements since. In the latest first quarter, 45% of Infosys’s large deal wins came from renewals, and Wipro’s large deal wins spiked to $2.7 billion.
Hiring—a brighter picture
Anticipating a revival in demand, Indian IT majors over-hired again in FY23. But that did not pan out as expected. After a bloodbath in FY24, the sector returned to hiring in FY25, with a net addition of more than 20,000 employees during the year.
The only exceptions were HCL Tech and Mphasis, which saw a reduced net headcount in FY25. Mphasis also refrained from adding employees even as attrition continued, possibly as the management prioritises margins and counts on automation to improve employee productivity.
Role of the regulator
The global IT sector is currently concentrated in the hands of a few large players. However, companies such as Google and Microsoft are facing lawsuits involving competition watchdogs. The fates of their businesses can end up spilling over to Indian IT majors.
Concentration could also cut the other way around as geopolitical conflicts metamorphose into business risks. A recent instance is that of Nayara Energy, an Indian oil refining company that saw Microsoft suspending its services citing European Union sanctions due to the company’s ties to Russia. Such cases could push clients to look at diversifying their IT vendors.
Another risk could come from regulations catching up with the use of individual private data in emerging technologies such as AI. Regulations around blockchain are emerging as well, while policies around the supply of semiconductor chips could impact the evolving AI space.
The IT services sector could also suffer under the strain of regulations governing their clients. For example, the BFSI segment tends to be heavily regulated. The Indian telecom sector may also be exposed to regulatory risks. IT providers most at riskarethose that derive significant chunks of their revenue from a select few clients or geographies.
The flip side is that the government’s push for renewable energy, clean mobility, defense, and domestic manufacturing is expected to boost the automotive, energy, electronics, and defense sectors. This should, in turn, drive up their IT budgets, which bodes well for Indian IT firms.
Looking ahead
While valuations ran ahead of earnings in 2020, corrections in 2020 and 2025 so far have helped bridge the gap. On average, over the past five years, Nifty IT has traded at a premium of around 28% over the broader Nifty 50 index.
But it is important to note that order-wins during the first half of the fiscal year set the stage for hiring, execution, and growth for the rest of the year. Currently, tariff uncertainty still persists and India-US trade-talks don’t seem close to completion. So, earnings upgrades are unlikely this fiscal year.
The medium-to-long-term outlook, however, is expected to vary across segments. Considering that BFSI has supported Indian IT’s growth thus far while manufacturing has lagged, whenever the geopolitical fog clears, companies catering to the manufacturing segment could be expected to outperform.
Similarly, if the policy environment improves in the US, it would play out well for the overall sector.
Ananya Roy is the founder of Credibull Capital, a Sebi-registered investment adviser. X: @ananyaroycfa
Disclosure: The author holds shares of some of the companies discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.
