Indian IT services companies are adopting stricter cost-control measures to safeguard margins as slowing client spending and artificial intelligence-led pricing pressure weigh on revenue growth. According to Kotak Institutional Equities, companies are increasingly depending on workforce optimisation, delayed or lower salary increments, reduced variable pay and the depreciation of the Indian rupee to maintain profitability in a challenging operating environment.

The brokerage expects Tier-1 IT companies to report sequential revenue growth of around 0 to 2 percent during the second quarter of FY27. In contrast, mid-tier IT firms are likely to deliver relatively stronger performance by benefiting from market share gains and new contract wins. Kotak noted that sector profitability remains resilient, but this resilience is being driven more by disciplined cost management than by robust revenue expansion.

Artificial intelligence continues to create opportunities for technology service providers, but it is also reshaping the industry's traditional business model. Demand for AI-related projects is rising steadily; however, the productivity improvements delivered by AI are reducing the number of billable employee hours required to execute projects. This trend is particularly affecting time-and-material contracts, while fixed-price and managed-services agreements are also facing pricing pressure as clients seek to capture productivity gains through lower contract values.

Kotak believes that the deflationary impact on traditional IT services is likely to outweigh the revenue benefits from new AI-related work over the near to medium term. The brokerage highlighted that lower software development volumes and tougher pricing negotiations are already reflecting this structural shift across the industry.

The impact is expected to be more pronounced for large Tier-1 IT companies, which have a greater proportion of legacy contracts that are vulnerable to AI-driven productivity improvements. Mid-tier firms, on the other hand, are better positioned to offset these pressures through faster deal wins and market share expansion, resulting in an increasingly uneven growth outlook across the sector.

The report also noted that Indian IT companies experienced a mixed performance during the first quarter of FY27, as geopolitical uncertainties, macroeconomic concerns and client-specific issues delayed project execution and contract closures. Companies with large deals entering the implementation phase reported relatively stronger growth, while those exposed to discretionary technology spending and pricing pressure faced weaker performance. Several firms also lowered their organic growth expectations following delays in client decision-making.

Despite these challenges, demand remains healthy in selected areas including vendor consolidation, digital transformation, legacy system modernisation, cost optimisation initiatives, outsourcing and the establishment of Global Capability Centres. Kotak expects geopolitical uncertainty to remain a headwind during the September quarter, although an improvement in the broader economic environment could accelerate client decision-making and support the execution of delayed projects.

For large IT companies, the primary challenge is no longer limited to securing AI-related contracts. The industry must now generate sufficient AI-driven revenue to offset the pricing pressure and reduced effort requirements affecting its traditional technology services business.