The Indian information technology (IT) sector is navigating one of its most challenging phases in recent years, with slowing global demand, delayed deal execution and rising concerns around the long-term impact of artificial intelligence reshaping investor sentiment.
The Nifty IT index has declined nearly 25 per cent in 2026 so far and remains the only laggard in April as weak earnings, muted guidance and persistent margin pressures across large-cap companies triggered a sharp reset in sector valuations.
In an interaction with BW Businessworld, Ajit Mishra, SVP— Research, Religare Broking, discusses whether the current downturn in information technology stocks is cyclical or structural, the impact of artificial intelligence on profitability, and why the sector may be entering a lower-growth, efficiency-driven phase.
He also shares his outlook on valuations, hiring trends, discretionary spending cuts and the investment strategy investors should adopt amid continuing uncertainty in global technology spending.
Edited excerpts:
The Nifty IT index has declined nearly 25 per cent in 2026 so far. Do you see this as a cyclical correction or the beginning of a structural slowdown in the sector?
The sharp decline in the Nifty IT index in 2026 reflects a combination of cyclical pressures and emerging structural shifts rather than a single underlying cause. On the cyclical side, global macroeconomic conditions remain challenging, particularly in key markets like the US and Europe, which contribute a majority of revenues for Indian IT firms. Elevated interest rates, inflationary pressures and geopolitical uncertainty have made clients cautious, especially regarding discretionary IT spending. This is evident in subdued FY27 revenue guidance, with Infosys projecting 1.5 to 3.5 per cent growth and HCLTech guiding 1 to 4 per cent in constant currency terms.
Structurally, the sector is undergoing a transformation driven by rapid adoption of artificial intelligence and automation. These technologies are beginning to disrupt the traditional effort-based billing model, with estimates suggesting a 14 to 16 per cent potential revenue impact due to productivity gains. At the same time, the valuation correction, from around 29 to 20 times price to earnings (PE) indicates that markets are adjusting expectations to reflect slower growth and changing business dynamics. Therefore, while the current weakness is largely cyclical, it also signals the early stages of a structural transition.
All large-cap IT companies missed expectations in the March quarter. Is this largely a demand issue or are we now seeing margin-led stress becoming structural?
The primary issue remains weak demand, which is indirectly exerting pressure on margins. Large-cap IT firms reported low single-digit growth in FY26 in constant currency terms. Infosys, for instance, delivered around 3 per cent growth, reflecting continued demand challenges.
Slower revenue growth impacts operating leverage, a key driver of profitability. When growth moderates, companies struggle to absorb fixed and semi-variable costs effectively. Employee expenses, which account for 40 to 60 per cent of revenues, remain relatively sticky. Additionally, firms continue to invest in AI, digital transformation, and cloud capabilities, adding to cost pressures.
Despite this, margin stress should not yet be seen as structural. The current pressure is largely cyclical, driven by delayed deal execution, cautious spending, and ongoing investments. Over time, improvements in utilisation, automation, and a shift toward higher-value services should help stabilise margins.
With companies like Infosys and HCLTech guiding for just 1–4 per cent growth for FY27, how should investors interpret this muted outlook?
The muted FY27 growth guidance from bluechips reflects a consolidation phase rather than expansion. While deal pipelines remain strong, the nature and timing of deal execution have changed significantly. Infosys reported USD 14.9 billion in TCV for FY26, indicating robust deal wins. However, conversion timelines have lengthened, delaying revenue realisation. Execution cycles have extended to 2 to 3 quarters from the earlier 1 to 2 quarters, as clients adopt a cautious approach.
Additionally, a larger share of deals is now focused on cost optimisation rather than transformation, which typically generates lower growth. This suggests that while demand visibility exists, revenue growth will lag. Investors should view this phase as transitional, with recovery dependent on improvement in macro conditions and client confidence.
HCLTech flagged project cancellations and discretionary spending cuts. How deep is this slowdown, particularly in key markets like the US and Europe?
The slowdown is most evident in the US, which contributes about 55 to 60 per cent of revenues for Indian IT firms. HCLTech highlighted cancellations of large SAP programs and discretionary cuts by major US telecom clients, indicating stress in sectors like telecom and BFSI.
This weakness is significant given the US market’s dominance. Clients are deferring or scaling down non-essential projects amid macro uncertainty. In contrast, Europe, which accounts for roughly 30 to 32 per cent of revenues, has shown relatively better resilience. Segments such as manufacturing and utilities have reported moderate growth of around 10 to 11 per cent year-on-year.
Overall, the slowdown is not uniform but sector- and geography-specific. While certain areas remain under pressure, others continue to show stability, suggesting that the downturn is not broad-based.
Companies are highlighting AI as a growth lever, but also flagging pricing pressure. Is AI a net positive or negative for IT services profitability in the near term?
In the near term, AI is likely to be a net negative for profitability. Companies are investing heavily in AI capabilities, including training employees and building infrastructure. Infosys, for example, has deployed over 4,600 AI projects and trained more than 2.5 lakh employees.
At the same time, clients are demanding cost reductions of 20 to 30 per cent through automation, leading to pricing pressure. This combination of higher costs and lower pricing compresses margins in the short term.
However, over the long term, AI is expected to be a net positive. As companies scale AI-led services and move up the value chain, they will be able to command better pricing. Productivity gains and efficiency improvements will also support margins. Thus, while near-term profitability is impacted, AI remains a key long-term growth driver.
With TCS reporting its first annual revenue decline and Wipro extending its contraction streak, does this signal a broader reset in the IT growth cycle?
The performance of TCS and Wipro indicates a broader reset in the IT growth cycle. TCS reported a marginal revenue decline of about 0.5 per cent in FY26, while Wipro continues to see flat to negative growth.
This marks a shift from the high-growth phase of 10 to 15 per cent seen post-pandemic to a low-growth environment of 1 to 4 per cent. The sector is transitioning into a more mature, efficiency-driven phase.
In this environment, success will depend on productivity, automation, and execution rather than aggressive hiring and expansion. Companies will need to focus on cost control and delivering higher value services, signaling a structural evolution in the industry.
TCS reduced headcount significantly while peers added employees. Do you see this as early cost rationalisation across the sector?
TCS reducing headcount by around 23,000 employees reflects a broader shift toward cost rationalisation. While some peers have added selectively, the overall trend is moving away from aggressive hiring. Attrition has moderated to around 12 to 13 per cent, reducing replacement hiring needs.
AI and automation are also lowering demand for entry-level roles, enabling companies to improve productivity. This indicates an early shift toward efficiency-focused workforce strategies, where output per employee matters more than scale.
After the recent correction, are large-cap IT stocks approaching fair valuations, or is there still downside risk given earnings uncertainty?
Valuations have corrected significantly, with the Nifty IT PE declining from around 29 to nearly 20 times, closer to its long-term average of 18 to 20 times. This improves relative attractiveness. However, downside risks remain due to earnings uncertainty. With FY27 growth expected at just 1 to 4 per cent, earnings upgrades are unlikely in the near term, and further downgrades cannot be ruled out.
Companies like Infosys and TCS continue to face challenges in demand visibility and deal conversion. While valuations are more reasonable, they may not yet represent a definitive bottom.
For investors with exposure to IT, would you recommend holding, accumulating on dips, or reducing allocation over the next 6–12 months?
A cautious and selective approach is advisable over the next 6 to 12 months. Given muted growth expectations and macro uncertainty, near-term upside appears limited. Short-term investors may consider reducing exposure, especially where valuations remain elevated.
Long-term investors can consider accumulating high-quality large caps like TCS and Infosys gradually. These companies offer strong cash flows, net-cash balance sheets and stable dividend yields of around 3 to 4 per cent.
However, caution is warranted in mid-cap IT, where valuations remain high at 30 to 50 times despite weaker earnings visibility. A staggered investment strategy focused on quality and strong execution capabilities is likely to yield better results as the sector navigates this transition phase. |
