AI Disruption Hits Indian IT Giants’ Margins

Indian IT’s AI Dilemma: Giants Under Pressure as AI Reshapes the Sector

Indian IT’s AI story today is increasingly being described as a tale of two worlds. On one side are large incumbents like TCS and Infosys, profitable, busy and still winning big contracts. On the other is a growing analyst consensus that these firms are not leading the AI revolution, and that this lag is beginning to show up in margins, deal structures and stock valuations across the Indian IT services sector.

How AI is changing the economics of Indian IT

A widely discussed February 2026 expert analysis in the Economic Times bluntly stated that India’s top IT companies “are not leading the AI revolution.” Market expert Sudip Bandyopadhyay argues that the biggest Indian IT firms missed the early opportunity to build proprietary AI platforms, leaving them heavily dependent on global AI providers such as OpenAI, Microsoft and Google.

This dependence fundamentally changes the economics of Indian IT services. Unlike the traditional labour-arbitrage model, AI-led projects now involve licence fees, subscriptions and royalties, creating what analysts call structural margin compression. Value that once accrued almost entirely to Indian IT vendors is now shared with global AI platform owners, squeezing profitability even as revenues grow.

A companion explainer titled “AI Disrupts Indian IT: Why TCS and Infosys Face Pressure” highlights another shift: AI automation challenges the long-standing model of deploying large teams over extended timelines. With AI agents increasingly handling coding, testing, documentation and support, clients are pushing for smaller teams, faster delivery and outcome-based pricing, accelerating the shift from billing hours to billing outcomes.

Margin pressure and inevitable restructuring

According to Bandyopadhyay, the pressure on large Indian IT companies is far from over. He warns of sustained operating margin pressure as AI cannibalises traditional high-margin work while licensing costs rise. His assessment is stark: TCS, Infosys and peers will need deep restructuring of delivery models and workforce pyramids, a process that will reflect in financial performance and eventually in valuations.

This transition is already visible in headcount data. Across the top five Indian IT firms, net hiring during the first nine months of FY26 turned negative, with several companies reducing staff as automation replaces low-end roles. Even when revenues remain resilient, restructuring costs, bench management and pricing pressure are making margin defence increasingly difficult.

Niche AI players steal the spotlight.

While large incumbents adjust, specialised and mid-tier IT firms are emerging as key winners in the AI transition. According to the Economic Times, newer players focused on vertical-specific AI solutions, from travel and EVs to enterprise automation, are seeing faster growth and rising investor interest.

A February 2026 Forbes India analysis notes that AI-led deals have become the primary growth engine for the sector, with Q3 FY26 witnessing a surge in AI-centric contracts after nearly two years of subdued demand. Estimates suggest that around 74% of new IT contracts signed since mid-2024 are AI-driven, highlighting how AI has moved from experimentation to mainstream revenue, but also intensified competition.

Are TCS and Infosys really behind in AI?

It would be inaccurate to suggest that Indian IT giants are standing still. TCS, for instance, has disclosed an AI services business approaching $1.8 billion annually and plans to invest nearly $6.5 billion in AI data centres, signalling a shift towards owning more of the AI stack. Infosys, meanwhile, has taken a more capital-light approach, embedding AI across transformation programs while returning ₹18,000 crore to shareholders through a major buyback.

Financially, the leaders remain strong. In Q2 FY26, TCS reported operating margins of 25.2% on revenues of ₹65,799 crore, while Infosys posted 21% margins on ₹44,490 crore revenue with faster year-on-year growth. Both firms continue to win large deals, but analysts caution that AI-embedded contracts do not deliver the same incremental profitability when core models are licensed rather than owned.

A changed investment thesis for Indian IT

The broader conclusion from analysts is that the investment story for large-cap Indian IT has fundamentally changed. The historic model of predictable growth driven by cost arbitrage is giving way to an AI-driven restructuring cycle, marked by margin pressure, valuation compression and operational realignment.

At the same time, the upside narrative is shifting toward AI-native and specialised IT firms that built proprietary tools, copilots and domain models early. These companies are better positioned for outcome-based pricing, allowing them to capture higher margins despite smaller deal sizes.

When experts say that TCS and Infosys are not at the forefront of the AI revolution, they are not predicting collapse. Rather, they are signalling that the next phase of alpha in Indian IT services may come from a different set of players than those that dominated the past two decades.