AI to power next leg of IT growth, says Motilal Oswal; check top bets

Motilal Oswal Financial Services believes the next major upcycle in Indian IT services will be driven by an emerging artificial intelligence (AI)-led demand cycle, even as traditional tech spending and near-term data points remain limited. While consensus is still unsure about the timing and strength of a recovery, early signs of an AI services inflection are already visible at the enterprise level.

 

Its top ideas to play the next AI wave are HCLTech and Tech Mahindra in largecaps and Hexaware and Coforge in the midcap space.

Early AI signals

Motilal Oswal has highlighted that leading LLM providers such as OpenAI and Claude have begun building structured channel partnerships with system integrators, a clear sign that the services layer of AI is starting to formalise.

 

The brokerage expects these partnerships to gain momentum over the next six months, with AI services demand inflecting in CY26 as enterprises move beyond pilots to scaled deployments.

Why upgrade now if GenAI revenue is 6–9 months away?

While Motilal Oswal expects GenAI services to inflect meaningfully only in 6–9 months, it argues that the sector can re-rate ahead of the revenue turn as deal announcements for AI services start to pick up. It lays out the following timeline:

 

0-3 months (near-term): Furloughs and deal deferrals continue, with clients waiting for 2026 budgets to firm up. Little incremental demand is expected until Jan’26 when planning cycles reset.

 

3-9 months (H2CY26): Enterprises begin scaling AI services beyond pilots. Deal activity improves, with rising TCVs in application modernisation, data engineering, and integration-led work. This marks the first tangible evidence of the transition from hardware to services. 

 

H2FY27: AI-related deal conversion begins to show up in revenue. This is also when AI-linked productivity deflation begins to be offset by new AI services work. Large-cap revenue growth rates start improving toward the 6-7 per cent range.

 

FY28: AI services move into full deployment mode. Industry revenue growth rates materially accelerate to 8-9 per cent as AI modernisation, data workloads, and enterprise integration scale up. This supports a "sector-wide rerating" as growth visibility improves.

 

Motilal Oswal sees March–April 2026 as the “confirmation window” for this thesis, but believes current valuations offer a better entry point before that evidence fully appears.  CATCH STOCK MARKET LIVE UPDATES TODAY

GenAI is deflationary, but new AI services pool is underestimated

The brokerage acknowledges that GenAI is structurally more disruptive than earlier tech waves and that revenue deflation, especially in Application Development and Maintenance (ADM), is inevitable.

 

It estimates that 10–12 per cent of revenue in the ADM bucket could be at risk over 3–4 years (roughly a 2 per cent annual revenue hit). However, Motilal Oswal argues the market is underrating the size of the new AI services opportunity that will emerge from implementation and integration work. Drawing a parallel with the cloud cycle, it notes that while cloud hurt BPO and infrastructure management initially, it also created new revenue streams in data, migration and cloud engineering. The brokerage expects a similar trajectory with AI, with sector growth picking up meaningfully over FY26–FY28 as AI programs mature.

LargeCaps vs MidCaps in an AI-first delivery model

On whether largecaps will dominate again or midcaps can still outperform, Motilal Oswal sees a more balanced competitive landscape:

 

GenAI reduces delivery intensity and headcount dependence, narrowing the traditional scale advantages of the biggest firms. With strong partnership ecosystems and domain strengths, midcaps can compete more effectively than in previous tech cycles. That said, large, complex implementation programs are still likely to gravitate towards large caps with deeper consulting and transformation capabilities.

Has the IT downcycle bottomed?

Motilal Oswal believes most of the bad news is already in the numbers, from weak discretionary budgets and furloughs to delayed pipelines. Some incremental earnings downside is still possible if demand fails to turn, but with valuations at multi-year lows, the brokerage argues that incremental downside risk is limited unless the macro backdrop worsens materially. It views Q3 as largely a non-event, with more decisive signals expected around March–April 2026, once the 2026 IT budgets reset, US banking commentary stabilises, and early AI implementation data points start to emerge.

Valuation

Motilal Oswal believes the sector is near the bottom, with risks now skewed to the upside if its AI-led recovery thesis plays out. The brokerage analysis suggests outsized gains if this plays out, however, the current levels already bake in the status quo (GenAI-led deflation, demand apathy). 

 

It has upgraded the growth estimates to factor in the anticipated recovery, which expects to start reflecting in reported growth rates in H2FY27 and take full shape in FY28 as enterprises move into full-scale AI deployments. The brokerage has rolled target prices to FY28E earnings per share (EPS) and lifted target multiples by about 20 per cent.

 

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