AI deals are rising, but earnings lag: What lies ahead for Indian IT stocks

Indian IT stocks have fallen up to 34 per cent in 2026 as AI disrupted outsourcing model. Analysts remain cautious on FY27 outlook. They prefer TCS, Infosys, HCLTech, Coforge

Information technology (IT) stocks have plummeted up to 34 per cent year-to-date in 2026, compared to Nifty50's 9 per cent drop, as artificial intelligence (AI)-led growth disrupted the traditional outsourcing model. However, tailwinds from the rupee's depreciation against the US dollar (down 6.6 per cent in calendar year 2026) provided some cushion.

 

Analysts say investors expecting a sustainable rebound may need patience, as AI is reshaping the industry faster than revenue growth is catching up. In this backdrop, they expect 2026-2027 (FY27) could be a tough year for IT stocks; however, identifying the exact bottom may not be the right approach.

 

 

"Despite strong deal pipelines and rising total contract values (TCV), conversion into revenue remains slow due to pilot-led deployments, elongated decision cycles, and execution delays. As a result, the market remains cautious, with earnings lagging the AI narrative," said Manav Medewala, research analyst at Mirae Asset ShareKhan.

 

Decoding the selloff

 

Investors, meanwhile, dumped Indian IT stocks as global enterprises redirected technology budgets toward AI infrastructure, models and software rather than traditional outsourcing and application maintenance -- the core revenue pool for Indian IT.

 

Though enterprises are spending more on AI infrastructure, including GPUs, software and models, overall technology budgets are not expanding at the same pace.

 

"So, less money is left for traditional IT services companies. As a result, growth is slowing down, competition is rising, and consumption and pricing are under pressure," said Sumit Pokharna, VP – Fundamental Research at Kotak Securities.

 

While global technology spending continues to grow at 10-13 per cent, Indian IT services growth has slowed to around 3-4 per cent, he added.

 

Interpreting Q4 results

 

During the March quarter (Q4FY26), TCS reported Q4 deal wins of $12 billion, taking FY26 TCV to $40.7 billion. Revenue rose 5.4 per cent sequentially in rupee terms, while annualised AI revenue crossed $2.3 billion.

 

Likewise, Infosys signed 96 large deals worth $15 billion in FY26, up 28 per cent year-on-year, and guided for 1.5-3.5 per cent revenue growth in FY27 with operating margins of 20-22 per cent.

 

While Infosys sees a large opportunity across AI strategy, data, legacy modernisation and trust-led AI services, supported by platforms such as Topaz and Cobalt, the management also cautioned that productivity gains from AI would increasingly be shared with clients due to competitive intensity.

 

HCLTech reported annualised advanced AI revenue of $620 million, while FY26 services revenue grew 4.8 per cent in constant currency.

 

Among mid-cap companies, Coforge reported 36 per cent revenue growth and 92 per cent growth in profit in FY26, backed by a $1.75-billion executable order book. Persistent Systems delivered 25 per cent annual revenue growth despite moderation in momentum.

 

AI disruption: A longer-term opportunity?

 

Beyond the short-term disruption, Pokharna of Kotak Securities sees opportunities in areas such as AI data architecture, AI workflow agents and AI governance as most enterprises globally still operate on legacy systems.

 

Notably, Indian IT companies have historically demonstrated strong adaptability through multiple technology transitions including outsourcing, cloud and SaaS adoption.

 

"While the current AI transition is more structural in nature, it would be premature to discount the sector's ability to evolve once again," said Anshul Jethi, research analyst for IT at LKP Securities.

 

Stock picks

 

Even though good-quality stocks are available at reasonable valuations, said Pokharna, one doesn't know how long it will take for earnings to improve. He, however, picked Infosys, TCS, and Coforge as his preferred bets.

 

Investors with a higher risk appetite and a long-term investment horizon may consider incremental additions to existing positions, said Jethi of LKP Securities, adding that initiating fresh large positions is not advisable. HCL Tech and Persistent Systems are his preferred picks in the IT pack.

 

"Amid long-term growth opportunities and near-term execution challenges, investors may consider large-caps for stability and mid-caps like Persistent and Coforge for sharper AI monetisation," suggested Manav Medewala of Mirae Asset ShareKhan.    ==================  Disclaimer: View and outlook shared on the stock belong to the respective brokerages and are not endorsed by Business Standard. Readers discretion is advised.