With seasonal weakness expected to limit Q3 surprises, management commentary on AI deal pipelines and GenAI adoption could determine whether the sector’s nascent recovery extends into 2026 or stalls amid lingering macro uncertainty and tariff fears.
Besides muted growth, weak deal wins and H-1B visa fears, Indian IT services companies have been seen as losers in the AI race but analysts now say that monetization of AI for business-accretive deals is coming closer.
Nomura’s Abhishek Bhandari sees the transition happening now: “We think clients are gradually moving from proof-of-concept projects to standalone implementations of AI. Bigger revenue pools for India IT service providers should emerge when enterprise adoption of AI happens, which we think is likely to gather pace in the next 12-18 months.”
While 2024 was a year of experimentation in AI, 2025 marked initial enterprise adoption of Gen AI. “We expect wider adoption in CY2026 focused on established use cases, such as the improving efficiency of SDLC, legacy modernization, testing and knowledge management,” Kotak Institutional Equities said.
Analysts expect enterprises to gradually move from AI pilots toward scaled deployments as the year progresses, supporting deal pipeline stability, improving TCV, and higher activity in application modernization, data engineering, and AI integration-led work.
TCS has already announced its ambition to become the world’s largest AI-led technology services company, and peers are accelerating investments in GenAI capabilities, partnerships and platforms.
The $2 Trillion AI Infrastructure Bet
Hyperscalers are set to invest $2 trillion on AI infrastructure development over the next four years, with enterprise AI adoption expected to accelerate in 2026-27. This translates to incremental work for Indian IT companies in data management, AI enterprise platform development, and Agentic AI adoption and orchestration, HSBC’s head of research for India Yogesh Aggarwal said.
The firm expects “industry growth to accelerate to 4-5% in FY27/28,” driven by AI adoption that will “also accelerate the decades-old transformation work for modernising the legacy applications across large enterprises in the US and Europe.”
Analysts broadly agree that productivity gains are already materializing. “The adoption of AI tools is expected to drive revenue per employee thus supporting overall productivity,” industry observers note. “Most IT companies have established dedicated business units catering to Gen AI based solutions and many tangible use cases have been implemented across industry verticals.”
The expectation is that Gen AI-based deals would be significant drivers of incremental business growth in the medium term.
Early movers are staking claims through acquisitions and partnerships. Motilal Oswal highlights “early signs of AI strategy formation,” with companies investing in AI capabilities: “TCS (ListEngage, Coastal Cloud, DC investments), Wipro (Harman DTS), Coforge (Encora), and HEXT (CyberSolve). This shows companies are positioning themselves for early AI-led services demand.”
Critically, “leading LLMs such as OpenAI and Claude are opening structured channel partnerships with SIs, suggesting the AI services layer is beginning to formalize. We expect momentum here to build over the next six months, with AI services demand inflecting into CY26.”
The Deflation-to-Growth Transition
The narrative is shifting from AI as threat to AI as opportunity. HSBC still sees “AI deflation on IT services at 8-10% over 2-3 years, with 2025 already seeing a significant share of this impact.” But crucially, “there is some visibility on the deflationary impact of AI on IT services, while monetization of AI for business-accretive deals is also closer.”
Motilal Oswal expects “AI services demand could begin to improve from mid-2026 as hardware-led AI capex intensity moderates and spending gradually shifts toward software, platforms, and services. The Mar-Apr’26 budget reset period may serve as an initial indicator, with some AI programs potentially transitioning from preparation to early deployment.”
The firm believes “CY26 should represent the bottoming of the growth cycle, setting the stage for a more meaningful acceleration in 2HFY27 and FY28 as AI services move into scaled deployment.”
Underlying fundamentals may be improving. HSBC notes that commentary from IT industry customers signals improved confidence in the business outlook and, hence, a higher propensity to spend on IT.
Nuvama expects a recovery in tech spends in CY26, as enterprises look to restart spends on modernising legacy IT systems, and believes Gen AI revenue shall reach the infection point over next few quarters, becoming net accretive and thereby boosting growth.
Stock Picks for the AI Transition
Motilal Oswal prefers Infosys and Tech Mahindra among large-caps, while Coforge and Hexaware Tech remain its top picks among mid-caps. The firm likes Infosys as “it is well placed to benefit from enterprise-wide AI spending, given its discretionary-heavy mix and improving revenue quality, with pass-through revenue likely to stay low. At current valuations, upside risks meaningfully outweigh downside risks.”
Nuvama remains “positive on Tier-2 (LTIMindtree, Coforge, Persistent, Mphasis and Hexaware) and select Tier-1 (Infosys, TCS) names.”
As results roll in today, the market will be listening less for Q3 numbers and more for the answer to a single question: Is AI adoption moving fast enough to offset the structural slowdown in traditional IT services? The response could define not just this earnings season, but the sector’s trajectory through 2026 and beyond.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)