Investors fear AI-led margin erosion in IT firms

Bengaluru: Indian IT companies are facing fresh de-rating risks as new AI-led solutions and platforms intensify competition, threatening the current margin profile of the sector.

Following the launch of Anthropic’s new AI plug-ins, global IT services firms and major SaaS companies witnessed a sharp sell-off in their stocks. Investors are increasingly concerned that AI-driven automation could erode earnings as these tools eat into traditional services revenue.

Global brokerage firm Jefferies, in a recent note, said Anthropic’s Cowork plug-ins highlight how AI could disrupt application services revenue, which accounts for 40–70 per cent of IT firms’ topline. The brokerage cautioned that “more pain ahead” could be in store for the sector.

Industry experts believe Indian IT companies may see margin erosion in the coming quarters if enterprises adopt AI-led solutions at scale, as automation could cannibalise existing revenue streams.

“Indian IT firms face risks to their margin profile as the services pie shrinks with automation kicking in through AI plug-ins and similar tools. This is why IT stocks are under selling pressure,” said a Mumbai-based analyst.

Since Anthropic launched 11 plug-ins under its Claude Cowork suite, Indian IT stocks have taken a severe beating over the last two trading sessions. The plug-ins span multiple domains, including productivity, product management, marketing, legal, finance, enterprise search, bioresearch and data. The launch has intensified fears that AI agents could replace entire categories of software services.

Stocks of both large IT companies and mid-tier firms declined sharply over the past two sessions amid concerns over future margin pressure.

Notably, in the third quarter of FY26, most large IT firms either improved their operating margins or maintained them at stable levels. However, accelerating AI adoption is increasingly cannibalising revenues from existing projects.

Earlier, the management of leading IT firms had indicated that while AI-driven efficiencies may result in some revenue loss, a growing pipeline of AI projects could help offset the impact. They also noted that enterprises are likely to outsource the implementation of AI solutions to IT firms due to scale, complexity and data privacy requirements.

Meanwhile, Indian IT companies are aggressively investing in AI through acquisitions, large-scale employee upskilling and expansion into adjacent segments. Many firms are also gradually shifting contracts from traditional time-and-material models to outcome-based pricing structures.