AI deflation, Middle East conflict weigh on growth of Indian IT sector; inorganic route gains traction
Mumbai, August 3
India's large-cap IT services companies reported a muted start to FY27, with artificial intelligence-led pricing pressure and geopolitical uncertainties, particularly the Middle East conflict, weighing on revenue growth even as companies increasingly turned to acquisitions to bolster business, according to an Anand Rathi report.
The report said revenue growth remained subdued during the June quarter, with median constant-currency sequential growth at around 0.35 per cent, while margins came under pressure from wage hikes, AI-driven deflation and competitive pricing.
"Revenue growth continue to remain weak with median CC q/q growth at ~0.35%... Despite INR depreciation (~3.3%), median EBIT margin stood at ~16.3%..., impacted by wage hikes..., AI-led deflation & competitive pricing pressure," the report said.
Despite the near-term slowdown, the brokerage noted that AI adoption is beginning to translate into revenue, although most projects remain deployment-led and short-term in nature.
"Despite the muted Q1 FY27 for Indian IT pack, we see that AI monetization is visible now. The sector has been going through a period of weakness due to AI-led deflation compounded by geo-political impact."
The report added that while demand recovery remains uneven across sectors and geographies, long-term structural drivers remain intact as enterprises continue investing in AI deployment, legacy modernisation, data optimisation and sovereign AI initiatives.
At the same time, inorganic growth emerged as a key theme during the quarter, with most leading IT firms pursuing acquisitions or strategic investments to strengthen capabilities and offset weak organic demand.
"On the inorganic front, nearly every company supplemented organic growth with M&A or capex this quarter."
Among notable transactions, LTIMindtree announced the acquisition of Randstad Technology Consulting Services, Wipro expanded through the Mindsprint and Alpha Net deals, and Tech Mahindra acquired Avant Techno Solutions to deepen its BFSI capabilities. HCLTech committed significant investments towards AI infrastructure, while Tata Consultancy Services instead focused on ecosystem partnerships to drive growth organically.
The report remains constructive on the sector over the medium term, expecting enterprise software monetisation to gather pace in FY27, followed by a broader acceleration in IT services demand as AI deployment scales up through FY28.
— ANI
Reader Comments
Honestly, as someone working in an IT firm, I can see the AI-led deflation first-hand. Clients are expecting more for less because they think AI can do everything magically. The ground reality is different—it still needs human oversight and domain expertise. Good to see companies finally looking at acquisitions to fill the gaps.
The Middle East conflict is a big worry for us in India—it affects everything from oil prices to our trade routes. Even our IT firms are feeling the heat because many have clients there. The government needs to actively promote India as a stable alternative for IT services in these uncertain times.
It's concerning to see the Indian IT sector grow at such a sluggish pace. I feel the industry needs to focus more on innovation rather than just cost-saving. The acquisitions might help in the short term, but sustainable growth will require deep investments in R&D and unique AI solutions.
Let's not forget that India's IT sector has always been resilient. The muted Q1 is just a phase—next quarter will be stronger with AI monetization picking up. I like how TCS is going organic with partnerships rather than splurging on acquisitions. Sometimes patience pays off!
The article mentions "AI-led deflation" which indirectly means job pressure for fresh graduates. I'm seeing my juniors struggle to get placements this year. While companies are investing in AI, they must also upskill their existing workforce—otherwise, we'll have a huge unemployment crisis in the tech space.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.