IT Cos May Face Bottom Line Pressure Amid AI Adoption

Bengaluru: Indian IT firms are likely to face margin pressure in the coming quarters owing to factors like macro-economic uncertainty coupled with generative AI (GenAI) driven efficiency improvement. According to industry experts and management of IT services firms, clients are asking for passing on cost savings achieved through GenAI-powered solutions. This is leading to downward price revision in some projects at the time of renewal.

“Increasingly, clients are asking for cost savings received from GenAI-led solutions to be passed on to them. Due to this, around 20-30 per cent price reduction is happening in projects at the time of renewal. Apart from AI & GenAI, imposition of reciprocal tariffs by the US on its trading partners is making enterprises cost conscious, which may lead to margin pressure in the coming quarters,” said an industry analyst.

During the recently held fourth quarter results announcements, several IT firms have flagged up concerns with regard to margins. Many of these companies have said that discretionary spend is likely to be tepid in FY26, which will lead to less room for margin expansion in the coming quarters.

“We expect discretionary spending to remain soft; initially affecting retail & manufacturing, then spreading to other verticals amid geopolitical factors liketariffs & de-globalization. This may lead to budget cuts, contract renegotiations, or delays impacting growth for near to mid-term,” brokerage firm, Choice Broking wrote in a note on HCLTech. Indications of some client-specific issues have already been given by IT firms during the fourth quarter. For instance, Wipro management has said that they have seen some pauses in project implementation by a few clients.

In Q4, many of the domestic IT firms have seen margins being range bound without many reporting fall over the previous quarter. TCS saw its operating margin falling by 30 basis points sequentially to 24.2 per cent in Q4 of FY25. Infosys margin dropped 30 basis points to 21 per cent during this period. Wipro’s margin stood at 17.5 per cent, flat as compared to previous quarter. HCLTech’s Q4 operating margin fell 160 basis points to 17.9 per cent.

Sources in the know said that most companies are facing margin pressure as anticipated revival in demand is not happening during this year. Though margins face headwinds owing to GenAI and macroeconomic uncertainty, some factors will support the margin profile.

Lower hiring target for FY26, fall of rupee against dollar and vendor consolidation are likely to support margins during this period.