You ignored the AI alarm in Indian IT—now your portfolio feels the sting.
- Agentic AI could slash headcount‑based pricing, jeopardizing up to 45% of sector revenue.
- Legacy players (TCS, Infosys, HCLTech) are already posting double‑digit AI‑led growth, while application‑service heavy stocks have dropped 30%+.
- Vertical‑SaaS outperforms horizontal SaaS by a wide margin; the Avenir Index is up 1% since 2021 versus a 49% decline for the broader SaaS basket.
- India’s data‑centre boom and tax incentives create a hardware edge that could accelerate AI adoption.
- Investors must weigh a bullish AI‑execution play against a bearish head‑count disruption scenario.
Indian IT’s Application Services Under Siege
Most Indian IT firms still bill on a headcount‑based model: the more consultants deployed, the higher the invoice. Agentic AI—autonomous software that can design, code, test and even deploy applications—threatens to replace thousands of routine‑coding resources. Palantir’s recent claim of compressing ERP integration from years to weeks using such AI sent a clear signal: the unit economics of traditional delivery are at risk.
Jefferies estimates that application‑managed services, which currently generate 22‑45% of sector revenue, are the most exposed. Companies like Coforge, Hexaware and Tech Mahindra rely heavily on these contracts; their shares have tumbled up to 33% in the past month as investors price in a potential erosion of billable hours.
Indian IT Winners: TCS, Infosys, HCLTech
By contrast, the three giants that diversified early into AI‑enabled solutions have shown resilience. Their revenue mix is less skewed toward pure application services and more toward outcome‑based offerings such as AI‑driven cloud, cybersecurity and analytics.
All three have reported double‑digit sequential growth in AI‑related revenues while the rest of the business creeps at single‑digit rates. TCS, for example, is building a 1 GW data centre and has signed OpenAI as an anchor client for 100 MW of capacity. Infosys partnered with Anthropic, and HCLTech has integrated generative AI across its enterprise workflow portfolio.
These moves not only protect margins but also help meet the “rule of 40”—a benchmark that combines revenue growth and EBIT margin to gauge a tech company’s financial health. While GAAP calculations show many Indian IT firms hovering near breakeven after stock‑based compensation and intangible amortization, AI‑driven cost reductions could push true rule‑of‑40 performance into the 40‑plus range.
Indian IT and the Vertical SaaS Advantage
General‑purpose large language models (LLMs) are now commodity, but differentiation comes from domain‑specific data and vertical expertise. The Avenir Vertical SaaS Index, which tracks industry‑focused solutions, has risen modestly since 2021, whereas the horizontal SaaS index has lost nearly half its value.
Legacy providers that embed AI within niche verticals—banking, healthcare, telecom—can leverage proprietary client data to deliver higher‑value outcomes. Start‑ups attempting to compete on price alone struggle because replicating the security, compliance and ecosystem depth of incumbents requires capital that the market cannot sustain.
Indian IT’s Path to Outcome‑Based Pricing
The shift from resource‑based to outcome‑based contracts is already underway. As AI reduces the labor component of software delivery, firms that continue to price by headcount risk margin compression. Companies that can promise “AI‑accelerated time‑to‑value” and tie fees to measurable results will command premium pricing.
Upskilling the workforce is essential; the arbitrage from cheaper labor is disappearing. Firms that invest in AI‑augmented development platforms—such as Claude Code, which can read, build, test and debug code in minutes—will retain talent, improve delivery speed and protect profitability.
Data Centre Build‑Out: India’s Hardware Edge
AI workloads demand massive compute, storage, power and cooling. India’s abundant land, water and recently announced tax breaks for foreign data‑centre operators make the country an attractive hub for AI infrastructure.
Domestic conglomerates (Adani, Reliance) and global cloud leaders (Microsoft, Amazon, Google) have pledged hundreds of millions of dollars to new facilities. Higher local capacity will lower latency and cost for AI‑infused SaaS, attract model‑ops workloads, and enable Indian IT firms to capture a share of inference revenue—an emerging profit pool for AI service providers.
Investor Playbook: Bull vs. Bear Cases for Indian IT
Bull Case: Companies that successfully transition to AI‑driven, outcome‑based models will see margin expansion and faster revenue growth. Look for firms with early AI partnerships, data‑centre commitments and a diversified service mix. TCS, Infosys and HCLTech fit this profile; their stocks may be undervalued relative to the AI upside.
Bear Case: Firms overly dependent on traditional application services may see a steep decline in billable hours as AI automates routine coding and testing. Coforge, Hexaware and Tech Mahindra could face margin pressure and earnings volatility if they fail to upskill staff or pivot their pricing.
Strategic positioning matters. Investors could overweight the AI leaders, maintain a small exposure to the vulnerable pure‑play application services stocks for contrarian play, or consider sector‑wide ETFs that tilt toward outcome‑based providers.
In summary, the AI wave is not a single‑direction threat; it is a catalyst that will reward adaptability and punish inertia. The next quarter will likely separate the IT firms that become AI‑enabled growth engines from those that become relics of a headcount‑driven past.