Synopsis : Kotak Institutional Equities believes AI is reshaping India's IT services industry, favouring TCS among large caps and Coforge, Hexaware and Indegene among mid-tier companies. While the brokerage expects another soft quarter for Infosys, Wipro and HCLTech, it sees stronger execution, healthier deal pipelines and better growth prospects among select challengers.
India's IT services sector is entering a new phase as artificial intelligence begins reshaping client spending, pricing models and competitive dynamics. According to Kotak Institutional Equities, AI is creating long-term opportunities but is also increasing pricing pressure, making stock selection far more important than simply betting on the broader sector.
The brokerage has maintained a 'Neutral' stance on the IT sector, expecting the June quarter to remain weaker than normal due to subdued discretionary technology spending, AI-driven productivity pass-throughs, macro uncertainty and the impact of recent geopolitical tensions.
Despite these challenges, Kotak continues to favour select companies that have demonstrated stronger execution and consistent deal momentum.
AI is changing the economics of IT services
Kotak believes rapid improvements in generative AI are beginning to alter the traditional business model of IT services companies.
Rather than creating entirely new technology budgets, most enterprise AI spending is currently replacing existing technology expenditure. Clients are also demanding productivity benefits upfront in outsourcing contracts, increasing pricing pressure even before service providers fully realise efficiency gains.
Reflecting this trend, Kotak has reduced its FY27-FY29 revenue estimates for several companies and lowered fair value estimates across the sector while increasing its cost of equity assumptions to account for higher long-term disruption risks.
Challengers continue gaining market share
According to Kotak, the next phase of industry growth is likely to favour agile mid-tier IT companies over traditional large-cap incumbents.
While large companies continue facing slower growth because of cautious client spending and cost optimisation initiatives, several challenger firms have continued winning large transformation contracts, expanding internationally and strengthening client relationships through acquisitions.
The brokerage believes this trend could continue over the coming years.
Coforge remains Kotak's preferred mid-tier IT stock
Among mid-cap companies, Coforge continues to be Kotak's top preference.
The brokerage expects reported revenue to rise sharply following the consolidation of the Encora acquisition, although underlying organic growth is likely to remain broadly stable during the June quarter.
Kotak also expects the company to continue generating healthy large deal wins while maintaining its long-term aspiration of delivering around 15% organic growth.
While margins could remain under pressure because of the Encora acquisition, the brokerage believes Coforge's execution capabilities and strong deal pipeline continue to support its long-term growth outlook.
Hexaware continues to impress
Hexaware also remains one of Kotak's preferred mid-tier names.
The brokerage expects revenue growth to be supported by vendor consolidation programmes, improved billing days and recently secured global banking contracts.
Investors are likely to closely monitor management commentary regarding the company's ability to achieve its full-year growth guidance while tracking execution of large transformation projects and AI-led opportunities.
Indegene benefits from healthcare demand
Kotak also remains positive on Indegene, citing resilient demand across pharmaceutical and healthcare clients.
The brokerage expects broad-based revenue growth, supported by healthy deal activity, continued investments in life sciences technology and expanding AI adoption across the pharmaceutical value chain.
Margins are also expected to improve through operational efficiencies and favourable currency movements.
TCS remains Kotak's preferred large-cap IT stock
Among large-cap companies, Tata Consultancy Services (TCS) remains Kotak's preferred pick.
The brokerage believes current valuations already reflect much of the near-term slowdown, making downside relatively limited compared to peers.
Although revenue growth during the June quarter is expected to remain largely flat, investors are expected to focus on management's strategy around AI investments, large deal wins, data centre expansion and future growth initiatives.
Kotak believes TCS remains the strongest positioned large-cap company because of its execution capabilities and attractive valuation.
Infosys, Wipro and HCLTech may face another weak quarter
Kotak expects several large-cap IT companies to report another challenging quarter.
Infosys is projected to deliver only modest organic revenue growth, while HCLTech's services business could see sequential weakness.
Wipro is also expected to report another soft quarter and may guide for flat-to-negative revenue growth during the September quarter.
Among large-cap peers, Tech Mahindra is expected to perform relatively better, supported by telecom deal ramp-ups, although foreign exchange losses could weigh on reported earnings.
Margins remain relatively stable
Despite continued pricing pressure, Kotak expects operating margins to remain broadly stable across most IT companies.
A weaker rupee continues supporting profitability, although many companies are unlikely to immediately realise these benefits because of existing currency hedge positions.
Companies including Tech Mahindra, LTIMindtree, Coforge and Hexaware could witness noticeable hedge-related impacts on reported earnings.
M&A activity accelerates
Kotak also highlighted increasing merger and acquisition activity across the sector as companies strengthen AI capabilities and expand client relationships.
Recent acquisitions by Coforge, Infosys, LTIMindtree and Persistent Systems reflect the industry's focus on building stronger AI offerings while organic growth remains relatively subdued.
The brokerage believes successful integration of these acquisitions will become increasingly important over the coming years.
AI monetisation remains the biggest long-term monitor
According to Kotak, the biggest long-term question for the industry remains whether enterprises eventually begin allocating fresh budgets specifically for AI instead of merely redirecting existing technology spending.
The brokerage believes sustainable long-term growth will depend on companies generating incremental AI revenue rather than relying only on productivity improvements and cost savings.
Conclusion
Kotak believes India's IT services industry is entering a structurally different phase where AI is simultaneously creating opportunities and intensifying competitive pressure. While the brokerage remains cautious on the sector overall, it expects challenger companies to continue outperforming traditional incumbents through stronger execution and healthier deal pipelines.
Among its preferred picks, Kotak continues to favour Coforge, Hexaware and Indegene within the mid-cap space, while TCS remains its preferred large-cap IT stock.
Disclaimer : This article is for informational and educational purposes only. The views, ratings and preferences mentioned are those of Kotak Institutional Equities and should not be construed as investment advice or a recommendation to buy or sell any security. Equity investments are subject to market risks, including sector-specific and company-specific risks. Investors should conduct their own research and consult a SEBI-registered investment advisor before making any investment decisions.
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