The IT sector stocks have seen sharp correction and most missed revenue expectations in the recent quarter. The AI-led deflation is becoming a new reality for the IT sector, Kotak Instituitional Equities said.
Kotak maintained a Neutral stance on the sector believing that earlier expectations of recovery by FY27 have been pushed out and growth estimates are now tightly clustered at 1 to 4% across Tier-1 companies.
What is AI-led deflation
The big fear was that Tech spendings are slowing down, however, Kotak highlighted that overall technology spending is accelerating, but a larger share of enterprise budgets is now being directed towards AI infrastructure, software and platforms. This shift is leaving fewer dollars for conventional IT services, weighing on growth.
Kotak estimates an annual revenue deflation impact of around 3.5% due to GenAI adoption over the next few years.
Gap widens between tech spend and IT services growth
The widening gap between overall technology spending and IT services growth has also been evident over the past year. Global tech spending grew 10.9% in 2025 and is expected to rise further to 13.4% in 2026.
In contrast, IT services growth slowed to 3.1% in 2025 and is projected to inch up to just 4.2% in 2026. This indicates that services are gradually losing share within enterprise tech budgets.
Pricing pressure and Intense competition because of AI
But how are AI spendings a problem of IT sector. Kotak highlighted that pricing pressure is coming from new deals as well as renewals of large contracts. Clients are increasingly demanding cost efficiencies, pushing companies to lower prices or deliver more work at the same cost. This trend is likely to weigh on both revenues and margins.
Another challange is that competition is increasing. Over the past decade, stronger players benefited from execution challenges faced by peers, gaining market share. That dynamic has now changed.
Most Tier-1 companies are operationally stable and competing for the same deals, leaving little room for share gains.
IT: Kotak positive over long-term
Despite near-term challenges, the report outlines a few positives. It believes AI-led deflation is cyclical and could reverse over the next two to three years as new opportunities emerge in AI implementation, data architecture and governance.
Certain verticals such as financial services and energy and utilities continue to show resilience. The report also notes that mid-tier IT companies are better positioned to capture emerging opportunities compared to larger incumbents.