Earnings outlook for Indian IT sector remains subdued: Geojit's Vinod Nair

AI adoption is reshaping cost structures, leading to shorter project timelines and thereby layoffs in low-skill roles, said Geojit's Vinod Nair

The earnings outlook for the IT sector could remain subdued in the short-term as AI continues to reshape the technology landscape, said Vinod V Nair, Head of Research at Geojit Financial Services, in an email interview with Abhinav Ranjan. Edited excerpts:

Indian IT stocks are under immense pressure due to AI concerns. Have the markets misread AI as a threat to software companies?

Markets appear to be overreacting to current AI-related disruption fears, triggering risk-off sentiment driven largely by concerns over potential outsourcing obsolescence. However, underlying sector fundamentals remain stable, with no meaningful slowdown in client spending so far.

AI is increasingly being integrated into delivery models, enhancing productivity and enabling transformation rather than posing an existential threat.

 

India is a hub for IT services and outsourcing. Could Indian IT companies become even more relevant in this changing ecosystem?

Indian IT companies can enhance their relevance by positioning themselves as strategic AI partners, bridging the gap between AI models and complex enterprise applications. By leveraging strong domain expertise, they can deliver secure, compliant, and integrated AI-led solutions. By embedding AI across projects through continued collaborations, the sector can enhance productivity, automate tasks, and gradually shift toward higher-value, outcome-driven services.

How do you see the current fundamentals of the Indian IT industry? Also, talk about the shifts toward new revenue models and discretionary spending.

The IT sector’s fundamentals remain stable, with no visible slowdown in client spending and deal pipelines staying healthy despite sentiment volatility arising from AI-related concerns. However, discretionary spending remains cautious due to uncertainty around tariffs and strong jobs data in the US.

Meanwhile, AI adoption is reshaping cost structures through automation, leading to shorter project timelines and thereby layoffs in low-skill roles, while gradually shifting business models toward outcome-based pricing. Over the long term, productivity improvements and workforce reskilling are expected to offset margin pressures and support sustainable growth.

AI companies are partnering with software companies. Is this incremental demand for IT firms or just a realignment with changing needs?

The partnerships between AI companies and IT firms create incremental long-term demand. While the market currently views AI as a threat to the "human-heavy" model, these collaborations suggest that AI is being used as a tool for expansion rather than just replacement. These solutions are expected to be incorporated into both existing and new projects, which should help ease concerns around long-term business sustainability. Also, there is no clear evidence of large-scale layoffs across the sector at this stage.

What's the outlook for IT earnings over the next few quarters? Are the markets factoring in a possible dip at the current levels?

The earnings outlook for the Indian IT sector remains subdued in the short term, with revenue growth for large players expected to remain modest over FY27–28. Market sentiment remains cautious amid potential headwinds arising from AI-led automation, outcome-based pricing models, and structural changes in traditional outsourcing, which could exert pressure on deal sizes and margins.