AI could drive Indian IT recovery from FY27

Indian IT services firms are projected to experience a robust recovery in growth starting from the fiscal year 2027 (FY27), as global technology spending transitions from constructing AI infrastructure to deploying artificial intelligence within businesses, according to a report by Anand Rathi, a brokerage firm. The report suggests that the AI investment cycle is transitioning into its subsequent phase, with companies placing greater emphasis on implementing AI, integrating it into existing systems, and generating quantifiable returns from their investments.

Anand Rathi, from Anand Rathi, elaborated on this by stating that the next phase of AI adoption is likely to be more services-oriented.

This change could prove advantageous for Indian IT services companies, which possess established expertise in technology implementation and enterprise services. The brokerage anticipates that technology spending which was postponed over the past few years will commence returning to Indian IT firms starting in FY27, as generative AI shifts from being an experimental concept to being widely embraced by enterprises.

The revival of growth could further strengthen in FY28 and FY29, potentially ushering in a multi-year growth cycle for the IT services sector.

Although Indian IT firms have endured nearly three years of reduced discretionary technology spending, extended deal cycles, and apprehensions that AI-driven productivity enhancements could diminish demand for conventional IT services, the extensive enterprise adoption of AI is anticipated to generate new technology requirements.

These requirements encompass data preparation, system integration, AI governance, legacy technology enhancements, cybersecurity, and the administration of AI agents. The brokerage asserts that AI is expanding the total addressable market for technology services, rather than contracting it. Furthermore, the decreasing costs associated with technology modernization could render certain projects previously deferred economically viable, presenting opportunities for IT companies in AI deployment, data optimization, and AI operations.

The transition towards AI deployment follows mounting pressure on global technology companies to demonstrate returns on their substantial investments in AI infrastructure. For instance, the top five hyperscalers' capital expenditure is projected to reach approximately $825 billion. In response, boards and chief financial officers are increasingly demanding clearer evidence of returns from AI investments.

Indian IT firms have already begun generating significant revenue from AI-related services; Tata Consultancy Services (TCS) reported an annualized AI revenue of $2.6 billion, while AI services constituted 8.2% of Infosys' total revenue. HCLTech and LTIMindtree have also reported expanding revenue streams from AI services. Nonetheless, the recovery is not devoid of risks.

Anand Rathi highlighted price pressures stemming from AI, weak global economic conditions, and the potential for initial setbacks for lower-end IT services before companies can transition towards higher-value AI work. Therefore, Anand Rathi's outlook is contingent upon Indian IT companies' ability to ascend the value chain as enterprise AI adoption intensifies, converting the industry's current AI disruption into a novel source of technology spending.