India IT faces uncertain demand environments from GenAI-led deflation and geopolitics: Report
New Delhi, June 28
The India IT sector is facing an uncertain demand environment from an unprecedented confluence of technology and business cycle headwinds from GenAI-led deflation and geopolitics, JPMorgan said in a research report. The brokerage warned that a meaningful recovery in industry growth remains distant as enterprises grapple with shifting tech priorities and budget constraints.
The brokerage said the IT services industry "has been stuck at 2-3% revenue growth over the last three years" and, with "AI deflation still only in Year 2," it sees "further headwinds to growth over the next two years." In light of uncertainty around the timing of a positive inflection, JPMorgan has moderated its medium- to long-term growth estimates and now does "not expect large-caps to hit mid-single-digit growth and hover around 3-4% revenue growth."
"Enterprises face FUD (fear, uncertainty, doubt) from changing tech and geopolitics, with tech services budgets crowded out from spending on AI tokens and cloud keeping industry growth recovery prospects uncertain," the report noted. Checks indicated "delays in deal ramp-ups and signings due to continued client indecision from geopolitical uncertainty and sharp AI changes," with weakness likely to "bleed into 2QFY27."
JPMorgan reiterated that the sector is still in the first phase of its three-stage AI adoption model -- Deflation -- where "AI-led productivity gains in legacy/maintenance-heavy areas... are not entirely compensated by new AI services." The firm said "positive inflection is some time away, suggesting the industry growth funk could last longer than expected," and now fears the recovery "will extend beyond FY29 to FY30, making the near-term growth curve look more 'L'-shaped."
On estimates, the brokerage said it cut 1Q revenue growth assumptions "across the board" and expects FY27 revenue guides to be trimmed, as the "usual 1H strength is unlikely to play out this time." Structurally, it no longer assumes scale firms will return to "long-term average growth of 7-8% in the medium term," and instead models growth to "stay below 3-4% for the foreseeable future."
Reverse DCF sanity checks drove "P/E multiple cuts by 10-25% across the board," with JPMorgan arguing current multiples that "trade below pre-COVID-19 averages... are justified, given that structural growth is stuck at below 5% now vs. 7-8% earlier." For multiples to re-rate, the brokerage said it needs to "see revenue growth accelerating where there is less visibility and confidence."
— ANI
Reader Comments
😔 Just when we thought the worst was over. AI deflation is hitting the bread and butter work - the maintenance and support contracts that kept our margins alive. But we Indians are resilient. We'll adapt. The question is how many jobs will be lost in transition.
As someone who works with Indian IT vendors, I see the struggle. Clients are demanding AI solutions but budgets are frozen. It's a chicken and egg problem - you need to invest to grow but growth is uncertain. JPMorgan's "L-shaped" recovery is worrying.
Interesting how the report points to "client indecision from geopolitical uncertainty." That's the Russia-Ukraine war effect plus US-China tensions. India IT is caught in the crossfire. But honestly, we should have diversified into product development earlier.
Respectfully, I think the Indian IT sector can pivot. We've done it before - from Y2K to cloud to AI. The issue is that this AI transition is faster than previous shifts. Companies need to reskill at scale, not just hire fresh talent. NASSCOM should take the lead.
😓A cousin just got laid off from a major IT firm. This report confirms what many in the industry are feeling. The 3-4% growth forecast for the next 2-3 years is painful for a country that needs job creation. We need more startups and product companies, not just services.
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