Services side of AI wave to benefit Indian IT firms

Global AI (artificial intelligence) story is at a crucial juncture. At one hand, billions are being poured into building new platforms, solutions, and data centres; while enterprise adoption is progressing at a snail’s pace. This paradox is baffling a lot of industry watchers.

How does a company justify billions of dollars of investment into AI space without visibility of return? This question is making investors nervous. Now, one set of analysts have started talking about AI bubble, which has an uncanny similarity to Dot.com era. Even concerns over round tripping have also come to the fore.

In round tripping or circular financing, money is infused into a company with an agreement that the company will buy product or services from the investee company. In a way, this is happening to an extent in the AI space. Big tech firms are investing in AI startups with an explicit agreement that these startups will use cloud storage or leverage their chips.

So, if the AI investment doesn’t yield desired returns, then both companies will suffer- the investor and investee. That is the reason that tech firms in the US have seen some correction in their stock prices. Now, what does it mean for Indian IT industry? Since last year, Indian IT firms have been criticised for not investing enough in the AI space.

Investors have shied away from IT stocks because concerns over AI-led development leading to disruption in business models of these companies weighed on. Owing to these factors, Nifty IT index has been an underperformer since last year.

As concerns over too much money chasing AI space mount on, investors have started looking at Indian IT pack again. Interestingly, this renewed interest is due to the fact that Indian IT firms have not seen much buying amid the global AI race. Now, investors feel that as AI may not be able to match return on investment, established business models of Indian IT firms are better placed to justify their bets.

Moreover, some brokerage firms feel that investment entering into the AI infrastructure space has peaked. In past years, most investments have been pumped into building LLMs (large language models), data centres, sophisticated chips, and related space. Very less investment has gone into services segment of AI. At the end of day, each AI platform needs the help of services companies like IT firms for its integration, running and maintenance.

Brokerage firm, Motilal Oswal said in a report that investment into services side of AI is going to increase. This is definitely good news for the Indian IT industry. Since last year, Indian IT firms have been navigating a tough space, emerging from the fears of AI-led disruption. However, Q2FY26 results indicate that earnings of most Indian IT services firms have stabilised to a large extent.

Deal pipeline has increased and there is not much reduction in headcount. These indicators reflect that Indian IT industry has coped with the new AI wave well. So, if services side of AI implementation rises, then IT services firms will cash in from the emerging trend.