The IT services industry was banking on enterprise AI adoption to be the next great growth engine. Modernisation, implementation projects, and managed services — all waiting on the other side of the generative AI revolution. The only problem? That revolution is arriving, and instead of lifting revenues, it’s compressing them.
The latest earnings from Infosys and HCL Technologies tell a story the industry would rather not confront. Infosys’s FY27 revenue guidance of 1.5–3.5% came in below expectations, with management openly acknowledging that AI-driven productivity gains are now deflating the existing book of business. HCL went further, estimating a 2–3% drag on its own revenues from GenAI — and pegging the industry-wide impact at 3–5%. Stretch that over a four-to-five year horizon and the illustrative math gets uncomfortable: 15–20% of revenues potentially at risk. That number isn’t a forecast — it’s a directional signal of how large the repricing could get if mix shift doesn’t accelerate fast enough.
The Deflation Trap
The mechanics are straightforward, even if uncomfortable. AI tools are making existing delivery models more efficient. Fewer hours, fewer people, faster turnarounds. So clients are demanding those productivity gains be passed through — and they’re getting what they want. New deals now embed AI productivity commitments upfront, typically locked in over three-to-five year terms. Volumes are holding up, but realizations are under pressure. The work is getting done cheaper & faster, and the industry is absorbing the difference.
What makes this worse is where it’s happening. Application development, testing, and maintenance — the bread and butter of traditional IT services — are bearing the brunt. Engineering R&D, chip design, and infrastructure management are more insulated. But for the industry at large, the highest-margin, highest-volume service lines are exactly the ones AI is compressing first.
And the competitive dynamics are amplifying the pain. Infosys and peers have flagged large deals being walked away from because the economics simply don’t work. When you’re bidding against competitors willing to undercut on price in a low-demand environment, the rational choice is sometimes to step back. But when walking away becomes a pattern, the market is telling you something about the value of your delivery model.
Here’s what makes this particularly painful: the AI-led demand that was supposed to compensate for deflation exists — but its economics are fundamentally different. Currently, AI projects tend to be smaller ticket, efficiency-led rather than revenue-led, and often funded from the very cost savings they generate. It’s not an absence of demand. It’s a different kind of demand — one that doesn’t fill the revenue hole left by deflating legacy work at anywhere near the same rate.
Meanwhile, the productivity gains flowing through to clients aren’t flowing through to margins either. Both companies indicated that AI-driven savings are being reinvested into sales capacity and GenAI capability buildout rather than dropping to the bottom line. Revenue pressure with flat margins is a double hit on earnings growth — and the market is pricing it in.
What Comes Next
Does this mean the IT services industry is in terminal decline? HCL estimates that while 40% of its portfolio faces “AI disruption”, 55% sits in “AI-amplified” segments growing at 10%+, and a small but fast-growing slice is “AI-native”. The transition is underway. The question is speed.
The traditional model — labour arbitrage, linear headcount-to-revenue scaling, volume-driven growth — shows early signs of structural repricing. The companies that figure out how to sell AI-driven outcomes rather than AI-discounted labor will define the next era. The ones that don’t will find themselves in an increasingly brutal price war with diminishing returns.
The real fault line isn’t temporary versus permanent slowdown. It’s whether Indian IT can move from selling labor to selling outcomes, platforms, and software — fast enough to outrun the deflation eating into its core. The early evidence and market reaction suggests the race is tighter than most investors appreciated.
Where This Leaves Investors
Moments like this – where an industry is being structurally reshaped, not cyclically slowed – are where the biggest investment opportunities and risks emerge. Identifying those shifts early, before the transition fully reflects in earnings and valuations, is where thoughtful, research-driven investing makes a difference.
If you are looking to position your portfolio for these structural disruptions rather than reacting to them, this is exactly the kind of inflection points we focus on. Connect with us to explore how you can invest through these disruptions for long term compounding.
