2 hours ago
3
ARTICLE AD BOX
After nearly four years of underperformance, India’s information technology stocks are entering 2026 with expectations shaped more by realism than hype, as investors assess whether artificial intelligence can finally revive growth after a prolonged slowdown.The Nifty IT index is trading close to a four-year low, a sharp reversal from the pandemic-era boom that once made software exporters market favourites, according to an ET report. In 2021, the index surged nearly 60% on the back of emergency digital spending, cloud migration and strong deal pipelines. That momentum faded quickly as global inflation, aggressive interest-rate hikes and recession fears forced clients to rein in discretionary technology budgets, pushing the index down more than 26% in 2022.Although IT stocks recovered in 2023 and 2024 with gains of about 24% and 22%, the rebound lacked conviction. Markets were grappling with macro uncertainty and the early, unclear impact of artificial intelligence. In 2025 so far, the index is down more than 10%, marking its second-worst annual performance of the past decade.For investors who entered the sector after the 2021 peak, returns have been disappointing.
Even as defence, public sector banks and auto stocks climbed to new highs, IT names continued to lag, reflecting both cyclical pressures and deeper structural shifts.
Why demand stayed weak even as profits held up
On the cyclical side, demand from key markets has remained cautious. The US and Europe, which together generate the bulk of Indian IT revenues, have seen large enterprises delay major technology transformation programmes amid concerns over inflation, interest rates, geopolitics and trade policies.
Discretionary spending — critical for large digital and modernisation deals -- has stayed under pressure despite healthy corporate profits.Structural factors have added another layer of challenge. Years of automation, cloud migration and now AI adoption have sharply improved productivity at Indian IT firms. While this supports margins, it has also reduced the manpower required for similar workloads, limiting near-term revenue growth.
Companies are doing more with fewer people -- a positive for clients but a headwind for top-line expansion.As the sector looks ahead to 2026, the central question for investors is whether Indian IT can adapt to an AI-driven world and regain a sustainable growth trajectory. Most analysts believe it can, though not overnight.Sumit Pokharna of Kotak Securities argues that enterprise AI adoption will be a long journey.
He expects it to unfold over seven to eight years, with humans and AI agents working together. Connecting AI systems to complex enterprise platforms, testing them across industries and ensuring reliability will require significant effort, he says -- a process that plays to the strengths of Indian IT companies experienced in managing large, complex systems.Timing, however, has been a challenge. Indian IT firms were slower than global technology giants to position themselves as AI leaders.
Early AI-driven efficiency gains created a deflationary effect, allowing work to be done faster and cheaper, which weighed on revenues when clients were already focused on cost cutting.
AI monetisation emerges, but patience still required
That dynamic is now beginning to shift. Across the sector, companies are increasing investments in AI tools, platforms and talent. AI is being deployed internally to lift productivity, embedded into service offerings and used to help clients move from pilot projects to full-scale deployments.Nomura notes that nearly all Indian IT services companies are stepping up AI investments, focusing on internal applications, client solutions and ecosystem partnerships. Clients are gradually moving beyond proof-of-concept projects to standalone AI implementations - a transition seen as critical for meaningful monetisation.Early signs of traction are emerging. Tata Consultancy Services has said it has already reached about Rs 12,500 crore in annualised AI-related revenue, calling AI a “civilizational change” for enterprises.
The company is working with most of its top clients on AI projects, with deal activity rising quarter after quarter. Other large players are also reporting AI-led productivity gains and improved win rates in competitive bids.Even so, discretionary spending has yet to show a clear rebound. Kotak Securities points out that large transformation deals remain fiercely competitive, often involving global peers, which continues to pressure pricing.
2026 outlook
The outlook for 2026 appears more balanced than in recent years. In the most recent quarter, large-cap IT companies reported positive sequential constant-currency growth, surprising investors after several muted quarters. Growth ranged from about 0.3% at Wipro to 2.4% at LTIMindtree and HCL Tech.Order bookings have also been robust, with median year-on-year growth of around 26%, indicating that deal pipelines remain intact despite macro caution. Enterprise AI is increasingly moving from experimentation to monetisation. Infosys has reported productivity gains of 40–50% in select workflows through its services.AI platforms, while HCL Tech has said its advanced AI revenue has crossed $100 million, accounting for nearly 3% of its revenue base across 47 client accounts.Nomura forecasts revenue growth of about 4.5% for large IT firms in FY27, with mid-sized companies expected to grow faster. HSBC believes growth of 4–6% is achievable if global confidence improves and tariff-related uncertainties ease.Margins could also find some support. Productivity gains from AI, better utilisation and tight cost control are expected to offset wage hikes and investment spending.
Nomura expects modest margin expansion in FY27, while HSBC highlights strong cash-flow generation as a key sector strength. Many IT companies generate free cash flow close to net profit, enabling steady dividend payouts of 3–4%, offering downside protection to investors.Geographically, the US remains the largest market, contributing more than half of industry revenues. Europe is gradually improving, while Japan is viewed as a long-term opportunity given its low outsourcing penetration.
Analysts see deeper acceptance of Indian IT services in Japan as a potential growth driver over time.Most analysts stop short of predicting a sharp turnaround in 2026. Instead, there is growing consensus that the worst may be over. Double-digit growth like the pandemic years is unlikely to return, but stability and gradual improvement appear more realistic.Abhishek Jain of Arihant Capital Markets says the sector is adapting and innovating, with near-term expectations remaining neutral but prospects improving as AI-led deals from the US and Europe begin to flow through. Jefferies, however, remains underweight on the sector, citing weak headline growth and relatively high valuations even after the correction.
English (US) ·