India IT sector nearing FY27 revival; AI ramp-up to be key, says Nomura

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Nomura on Indian IT sector: India’s information technology services industry may be inching toward recovery after two years of sluggish growth, with Nomura analysts expecting a marginal improvement in revenue and profitability by FY27, driven by easing macro headwinds and a clearer monetisation path for artificial intelligence (AI)-led services.

Concerns around ‘AI loser’ narrative overstated

 

In a new outlook report for 2026, Nomura analysts Abhishek Bhandari and Karan Nain of Nomura acknowledged that investor sentiment has been clouded by muted top-line trends, with industry revenue rising just 1.8 per cent in FY25 and likely 2.9 per cent in FY26. This has raised concerns over whether the sector risks becoming a ‘net AI loser’ as automation compresses traditional revenue pools.

 

However, Nomura disagrees with this pessimism, arguing the softness is cyclical rather than structural. Across every major technology shift, the brokerage notes, the addressable market for IT service providers has historically expanded, not shrunk. As enterprises adopt more complex digital and AI-driven architectures, system integrators will continue to play a critical role in stitching together heterogeneous tech stacks.

 

Much of the current drag, Nomura said, comes from early-stage AI deflation coinciding with an uncertain macroeconomic backdrop. Clients are sharply focused on cost takeouts, slowing discretionary spending and delaying new digital projects. The brokerage’s proprietary analysis of Global 2000 companies suggested revenue trajectories for 2026 will mirror 2025 trends, implying stable but unspectacular demand.  ALSO READ | Nomura maintains 'Buy' on M&M, identifies the automaker as its top OEM pick

AI monetisation expected to accelerate within 12-18 months

 

Against this backdrop, Nomura forecasts a mild improvement in revenue growth for IT majors, with its coverage universe of large caps expected to post 4.5 per cent growth in FY27, above FY26 levels. Mid-cap IT firms, which have consistently outperformed over the past two years, are projected to maintain their growth premium. A quicker interest-rate easing cycle and resolution of global tariff disputes could provide further tailwinds.

 

A meaningful inflection, Nomura believes, will emerge as AI adoption moves beyond proofs of concept. India’s leading IT firms are already investing aggressively, embedding AI into internal workflows, revamping service lines, building capability in client-facing AI programmes, and partnering across the ecosystem. The transition from pilots to standalone implementations has begun, but the brokerage expects the larger revenue pools to open only when enterprises standardise data and scale AI deployment across business functions. This step-up is likely within the next 12-18 months and should also revive demand for cloud and data modernisation services.

 

On profitability, margins are set to rise modestly as revenue growth improves, backed by ongoing workforce optimisation efforts. For FY27, Nomura expects average earnings before interest, tax (Ebit) margins for large-cap companies in its coverage to expand by 30 basis points (bps) and mid-cap margins by 50 bps. AI investments will continue, but are unlikely to materially dent profitability.  ALSO READ | Buy Eternal, hold Swiggy: Elara Capital weighs India internet sector

Valuations attractive but stock selection critical

 

Valuations across the sector remain attractive, but Nomura stays selective. It has rolled forward its valuation framework to H1FY28 while maintaining target multiples. Companies delivering above-industry growth are likely to outperform, the brokerage said. Its preferred picks include Infosys and Cognizant among large caps, Coforge among mid-caps, and eClerx among smallcaps. Nomura maintains a contrarian ‘Buy’ on Wipro, while retaining a ‘Reduce’ rating on L&T Technology Services (LTTS). 

  That said, while near-term challenges persist, Nomura’s outlook suggests India IT may finally be positioned for a more constructive cycle as AI-led demand begins converting into revenue at scale.  Disclaimer: Target price and stock/sector outlook has been suggested by Nomura. Views expressed are their own.