Key Takeaways
- AI-driven productivity is causing 2-3% annual revenue deflation in traditional IT services
- TCS's AI services revenue crossed $2.3 billion, now over 6% of total revenue
- ICICI Direct estimates an incremental AI-led market of $300-400 billion by 2030
The Numbers Behind the Reset
India's top five IT firms closed FY26 navigating what analysts call a structural reset. The culprits: macroeconomic headwinds, West Asian geopolitical risks, and AI's double-edged impact on traditional services.
TCS, the country's largest IT services company, reported a 12.22% jump in March quarter net profit to Rs 13,718 crore. Revenue from operations for Q4 rose 9.64% to Rs 70,698 crore. For the full fiscal year, profit after tax increased 1.35% to Rs 49,210 crore, while revenue grew 4.58% to Rs 2.67 lakh crore.
Infosys posted a 20.8% rise in consolidated net profit to Rs 8,501 crore for the January-March quarter. Revenue from operations increased 13.4% to Rs 46,402 crore. Full-year net profit climbed 10.20% to Rs 29,440 crore, with revenue rising 9.6% to Rs 178,650 crore.
AI Is Cannibalizing Legacy Revenue
The sector is transitioning away from traditional effort-based delivery. AI-driven productivity is compressing revenue in legacy services. But this near-term hit is being offset by a surge in AI-native engagements.
“AI may cause about 2-3% annual deflation in traditional IT services revenues for the next couple of years. Indian IT services could see an incremental AI-led TAM of USD 300-400 billion by 2030.”
— ICICI Direct report
Client priorities are shifting. The old model billed by headcount and hours. The new model bills by outcomes. This means fewer bodies, tighter contracts, and higher margins on AI-native work.
Infosys management acknowledged that AI is beginning to cannibalise traditional IT services. The deflation is real. But so is the opportunity.
Mixed Signals for FY27
The FY27 outlook varies by company. TCS and Infosys signalled that the worst macro headwinds are receding. HCLTech and Wipro flagged continued volatility and soft discretionary spending.
“TCS is entering the new fiscal year with positive momentum on the back of new deal signings. A bulk of the headwinds we experienced in the recent past are mostly behind.”
— K Krithivasan, CEO, TCS
Krithivasan noted that the West Asia crisis impact will be limited to travel and transportation clients and those based in the Gulf region. The broader portfolio remains stable.
From Labor Arbitrage to AI Factory
Indian IT built its empire on labor arbitrage. Skilled engineers at lower costs than Western competitors. That model is now under pressure as AI automates routine coding and maintenance.
The industry's response: pivot to AI-native, outcome-driven contracts. Instead of billing for 100 engineers working 40 hours, bill for a working AI solution that delivers measurable results.
This shift explains the mixed FY26 numbers. Revenue growth is slowing in legacy services. But AI services are growing faster. TCS's AI revenue now exceeds 6% of its total top line.
What the Deflation Means in Practice
A 2-3% annual deflation sounds modest. It's not. Applied to the Indian IT sector's total revenue, it represents billions in compressed contract values each year.
Here's how it works: AI tools let a team of 10 do what 15 did before. Clients notice. They renegotiate contracts. The same work commands lower fees.
The upside: firms that master AI-native delivery capture the new $300-400 billion market. Those stuck in effort-based models watch margins erode.
Talent Metrics Are Evolving
The traditional metric for IT services health was headcount growth. More engineers meant more revenue. That correlation is breaking down.
AI-driven delivery requires fewer people per dollar of revenue. Hiring patterns will shift toward AI specialists, prompt engineers, and outcome architects. The days of mass campus recruiting may be numbered.
Related: How AI tooling costs are reshaping enterprise tech budgets
The $300 Billion Question
ICICI Direct's estimate of a $300-400 billion AI-led market by 2030 is the prize. But capturing it requires a different playbook than the one that built Indian IT's first $300 billion.
The winners will be firms that: build proprietary AI platforms, not just implement off-the-shelf tools; shift from time-and-materials to outcome-based pricing; and develop industry-specific AI solutions that command premium margins.
The losers will be firms that treat AI as another service line rather than a fundamental operating model shift.
Logicity's Take
Frequently Asked Questions
How much is AI impacting Indian IT service revenues?
ICICI Direct estimates AI is causing 2-3% annual deflation in traditional IT services revenues. This compression is expected to continue for the next couple of years.
What is TCS's AI revenue in FY26?
TCS reported annualized AI services revenue of $2.3 billion, representing over 6% of its total revenue.
What is the projected AI market opportunity for Indian IT?
ICICI Direct projects an incremental AI-led total addressable market of $300-400 billion by 2030 for Indian IT services.
How did Infosys perform in Q4 FY26?
Infosys reported a 20.8% rise in consolidated net profit to Rs 8,501 crore, with revenue from operations increasing 13.4% to Rs 46,402 crore.
What is changing about IT service contracts?
Clients are shifting from effort-based contracts (billing by headcount and hours) to modular, outcome-driven contracts that pay for delivered results rather than deployed resources.
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Source: Tech-Economic Times / ET
Manaal Khan
Tech & Innovation Writer
Produced with AI assistance and reviewed by the Logicity editorial team. Learn more in our Editorial Policy.
