India’s IT Sector Navigates the AI Shift: Growth, Valuations, and Future Trends
India’s IT services sector, long recognized as a global software powerhouse, is currently at a pivotal juncture. Even as the fundamental strength of its business model remains intact, investors are carefully assessing long-term growth prospects in an era increasingly defined by Artificial Intelligence. Recent discussions, including those at Infosys’ AI Day, are helping to clarify concerns and shape expectations.
AI’s Impact: Reduced Effort, Not Business Model Disruption
Sandip Agarwal, Fund Manager at Sowilo Investment Managers, emphasizes that AI isn’t poised to dismantle the core business model of Indian IT firms. Instead, the key change is a reduction in the effort required for projects. “For the first time in four decades, the effort itself is getting reduced,” Agarwal stated. AI tools are projected to cut project effort by 20–30%, directly impacting billing volumes under traditional contract structures.
This shift doesn’t necessarily signal decline, but rather a recalibration. Indian IT companies have historically demonstrated an ability to adapt to technological disruptions through reskilling and aligning with evolving client needs. This pattern is expected to continue with AI adoption.
Valuation Concerns and Growth Expectations
Despite the robust fundamentals, valuation remains a key concern for investors. Stocks in the sector have already corrected by 30-40% in the past year, offering some comfort, but Agarwal suggests a “wait-and-see” approach before revising views. Clearer revenue evidence in upcoming quarters will be crucial.
Current projections suggest a mid-single-digit growth phase for the next two to three years. Large-cap IT firms are anticipated to see revenue growth of 5–6%, with EPS growth around 7–8%. Mid-cap firms may experience slightly higher revenue growth of 10–12%, translating to 13–14% profit growth.
The Rise of Smaller IT Companies
Interestingly, smaller IT companies are emerging as potential beneficiaries of the AI revolution. Agarwal believes these firms are better positioned to adapt to AI projects and could see faster growth. In the 2022 COVID-related disruption, mid-cap firms benefited; now, the advantage may shift to slight-cap companies.
This is due to their agility and ability to focus on specialized AI implementations. Larger firms, while well-equipped for broad AI services, may face challenges in quickly adapting to niche requirements.
AI Implementation: A Core Strength for Indian IT
While India may not be at the forefront of hardware or Large Language Model (LLM) development, its strength lies in the implementation of AI, building AI agents, and providing related services. Both large and mid-sized companies are reportedly making significant strides in this area, with AI revenue potentially contributing 30-35% to their revenue within the next 2–3 years.
Did you know? India’s IT sector serves top Fortune 500 clients, leveraging a model of campus recruitment, large-scale training, and continuous reskilling to meet client demands.
Structural Changes and Market Dynamics
Agarwal highlights potential structural changes, including broader market participation and a shift towards smaller deals. These factors contribute to a cautious outlook, despite the optimistic view on AI-led opportunities.
Pro Tip: Investors should closely monitor the speed at which AI demand materializes and how valuations reflect potential slower growth and increased competition.
Frequently Asked Questions
- Will AI replace IT jobs in India? AI is expected to reduce the effort required for some tasks, but it’s more likely to reshape roles than eliminate them entirely. Reskilling and upskilling will be crucial.
- Are Indian IT companies prepared for AI? Industry leaders are confident in the sector’s preparedness for AI implementation and services.
- What is the expected growth rate for the Indian IT sector? A mid-single-digit growth phase is anticipated for the next two to three years, with variations between large, mid, and small-cap firms.
- Which IT companies will benefit the most from AI? Smaller IT companies are seen as potentially benefiting the most due to their agility and focus on specialized AI implementations.
What are your thoughts on the future of AI in the Indian IT sector? Share your insights in the comments below!
Explore more: CNBC TV18 on Small IT Companies and AI
