Financial Year 2027 marks the fourth consecutive year of anemic or subdued growth for Indian IT companies, representing a significant structural shift from the sector's historical double-digit growth trajectory. The IT services industry has been "stuck at 2-3% revenue growth over the last three years", with JPMorgan projecting only 3-4% revenue growth ahead and warning that recovery may extend beyond FY29, with near-term growth described as "L-shaped".
Several demand-side factors are driving this trend. Heightened geopolitical tensions, tariff-related uncertainty, and increasingly stringent manufacturing and data-sovereignty requirements are shaping client behavior, resulting in cautious investment decision-making. Customers are prioritizing cost rationalization to fund a strategic pivot toward AI-led transformation. Spending patterns are shifting from experimentation to industrialized business-driven transformation, with strong emphasis on cost discipline, regulatory resilience, and measurable outcomes. Transcripts +1
AI's dual impact is particularly significant. While creating new opportunities, AI is also causing deflation in traditional service areas. HCL Tech categorizes the industry into three segments: 40% at risk of disruption by AI (traditional areas like application development support, infrastructure operations, customer support) that could shrink 3-5% CAGR for a few years; 55% that can take advantage of AI (data, cybersecurity, cloud) and grow at 10%+ CAGR; and the remaining 5% in neutral territory. Transcripts +1
KPIT Technologies issued a stark warning on June 30, 2026, expecting a decline of nearly 1% in USD-reported revenues for Q1 FY27 compared to Q1 FY26. This decline was primarily attributed to "sudden actions by some European OEMs triggered by their recent profit warnings/adverse business outlook".
KPIT's warning reflects broader pressure on European OEMs who are "dramatically reduce their costs" with focus on "cost of the product and cost of production". This mirrors the challenges faced by larger IT companies in the manufacturing vertical, which declined 5.9% quarter on quarter for Infosys in Q4 FY26. The fact that KPIT's impact "was not seen coming earlier and has been realized only in the recent weeks" reflects the broader industry trend of delayed decision-making and sudden budget cuts that have characterized the demand environment across the IT sector. Transcripts +1
Morgan Stanley cut target prices across the IT sector in March 2025, reducing targets for TCS to ₹3,950 from ₹4,660 and for Infosys to ₹1,740 from ₹2,150. The brokerage forecast a "slower pace of recovery with moderate growth for a prolonged period," lowering dollar revenue growth forecasts by 100-200 basis points and expecting growth of 4.5% in FY26 and 6% in FY27 for India's large cap IT companies.
Infosys provided FY27 guidance of 1.5% to 3.5% growth in constant currency terms. Morgan Stanley expects Infosys to deliver 3% year-on-year constant currency revenue growth in FY27, including around 2 percentage points from acquisitions. This implies organic growth of only about 1%, weaker than the approximately 2.4% organic growth reported in FY26. The reliance on acquisitions for growth while maintaining margin guidance suggests Infosys is prioritizing margin protection over organic growth investment, potentially limiting its ability to capture market share in a consolidating environment. Transcripts
Morgan Stanley maintains that the derating story for largecap IT stocks is not over, primarily based on historical valuation bottoms that occurred at 11-13 times two-year forward earnings during previous downturns, particularly the 2015-17 slowdown.
The Nifty IT index has experienced a severe correction in the first half of 2026, falling from a 52-week high of 40,301 to approximately 29,071-29,393 by March-June 2026. This represents a decline of roughly 27-28% from peak, making it the worst January-to-March fall for Nifty IT since 2008. Current PE for Nifty IT is approximately 20x, below the long-term historical median of 22.2x.
The persistence of this premium despite significant corrections suggests the derating process may have further to run. The lack of direct AI exposure in Indian markets has made global capital shift toward "AI infrastructure, semiconductor and technology-heavy markets", while foreign investors have "more investable options than domestic investors".
The AI-led deflation impacting Indian IT companies appears to be more severe than the 2-4% currently priced in by investors. HCLTech estimates 3-5% deflation in "AI disrupted services" which represent approximately 40% of the industry, translating to 2-3% deflation for their overall portfolio. Industry-wide estimates suggest AI could push IT service prices down by 3.5% every year through FY2027–28. Transcripts
The most visible impact is on deal sizes.
This represents a 20% reduction in deal values due to AI efficiency expectations. However, achieving these compressed values requires "at least 25-30% more effort to convert and get to the same number", indicating increased competitive intensity.
The BFSI vertical has demonstrated relative resilience through FY26, with four of the five top-tier Indian IT services players seeing an increase in share of revenue from BFSI. This resilience stems from the non-discretionary nature of most BFSI spending. Banks and financial institutions are using "AI and technology investments for core productivity gains rather than discretionary innovation spending", creating a stable demand foundation even during macro stress.
However, this BFSI strength is insufficient to offset softness in telecom and manufacturing. The Communications sector faces "flat to negative budgets, impacting discretionary spend", while Manufacturing sees "discretionary spending remains constrained while clients prioritize cost optimization and operational resilience". The magnitude of softness in telecom and manufacturing overwhelms the BFSI strength, as these verticals represent a larger revenue base for most companies. Transcripts +1
Indian IT companies have implemented comprehensive cost efficiency programs to maintain margins amid revenue pressure. Infosys's Project Maximus delivers 30-50 basis points of margin improvement consistently across quarters. Tech Mahindra's Project Fortius has achieved remarkable 10 consecutive quarters of margin expansion, growing from 6.4% to 13.8%. HCLTech's Project Ascent focuses on GenAI-led delivery transformation, delivering 13-104 bps margin improvement per quarter. Transcripts +2
These programs are fundamentally changing the relationship between headcount and revenue growth. Infosys demonstrated that revenue per employee has been increasing over recent years, enabling revenue growth at a faster pace than headcount growth.
KPIT Technologies has experienced a dramatic 50% year-to-date decline, significantly worse than the 30-35% decline seen in most largecap IT names. This underperformance stems from company-specific factors: revenue growth decelerated from 44.77% in FY24 to 19.93% in FY25, and the company faces "unexpected slowdown in business from major European automotive customers".
Midcap IT companies have also experienced more severe declines than largecaps. Coforge declined 29% in CY26, while Persistent Systems dropped 25%. This reflects higher valuation multiples that faced greater compression, more concentrated business models, and less diversified client bases compared to largecaps.
However, not all midcaps are underperforming equally. Persistent Systems delivered 17.4% year-on-year revenue growth in FY26 with an EBIT margin of 15.6%, marking its 24th sequential quarter of growth. The company's AI-first strategy and strong engineering focus have helped it outperform peers, demonstrating that stock-specific triggers like AI investment intensity and cost program execution are increasingly differentiating investor preferences in the current derating cycle.
The current derating cycle is fundamentally different from previous IT downturns. While sector-wide factors like AI disruption and macro uncertainty affect all companies, stock-specific triggers are creating significant performance divergence. The era of treating Indian IT as a monolithic investment category is ending, replaced by a more nuanced approach that rewards genuine innovation, operational discipline, and strategic adaptation to the AI-driven future.
