The Indian IT sector continues to stay in focus. The IT stocks are seeing some buying after the sharo cut yesterday. Overall, the stocks have been battered significantly so far in FY26 and the Q4FY26 results have been tepid too. The outlook for FY27 is also muted. 

Kotak Institution Equities believes IT companies could face another year of moderate growth due to AI-led deflation, pricing pressure in the base business, and other macro challenges. Here are five key factors to watch out for.

1. AI led deflation is real

AI-led deflation is emerges as a key concern and is now becoming visible in management commentary across the industry.

The Kotak Institutional Equities report highlighted that HCL Technologies expects 3-5% annual deflation in traditional services, which account for nearly 40% of industry revenues. The brokerage noted that vendors are increasingly passing on future productivity gains from AI to clients upfront during contract renewals.

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It added that application services could become one of the most vulnerable segments as AI adoption accelerates.

At the same time, Kotak said AI-related business opportunities are growing rapidly, though not enough yet to offset pressure in the core business.

“The AI for business opportunity can be huge with enterprises starting to make large spending commitments to enable an AI-infused operating model,” the report said. However, it added that competition remains intense with traditional IT firms, consulting companies, startups and AI model firms all competing for market share. 

2. Revenue Growth remain weak

Among large IT firms, Tata Consultancy Services posted the strongest sequential growth in the March quarter with 1.2% growth in constant currency terms.

However, revenues declined sequentially for Infosys, HCL Technologies and Wipro, reflecting continued stress in demand.

Kotak also said guidance issued by most companies remained below expectations due to multiple headwinds, including macro uncertainty, pricing pressure, AI-related disruption and weak discretionary spending.

3. Hiring to remain weak

The IT sector was witnessing layoffs, restructiting and high attrition rate because of AI. In FY27 as well the hiring trend will be closely monitored. Kotak expects continued weakness in the hiring trend. “Net hiring has been weak for the past three years, an extended period of time compared to bouts of weakness in the past, pointing to a higher level of stress for Tier-1 companies than in the past,” Kotak noted.

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In Q4FY26, total headcount among the top six offshore IT firms declined sequentially during the quarter, while attrition remained in the 11-14% range across the industry. 

4. Manageable margin

Despite weak demand conditions, several companies reported margin improvement during Q4 and Kotak believes that “Margin headwinds are manageable by further flexing cost levers” such as lower wage hikes, reduced variable pay and tighter hiring in FY27 as well.

Q4FY26 saw the margin improvement due to cost optimisation measures and rupee depreciation benefits. 

5. Higher TCV growth to counter AI-driven deflation

    Deal wins across the IT sector remained reasonably healthy, but Kotak believes that “higher growth in new TCV will be required to offset additional headwinds from deflation in the base business.”

    Kotak added that deal TCV in Q4 FY26 may not be sufficient to fully offset AI-led pricing pressure in the existing business.

    Conclusion

    Kotak believes India’s IT sector could remain under pressure in the near-term despite healthy AI opportunities and continued margin resilience.