- Revenue growth outpaces profit declines for all major players.
- One‑time labour‑code charges are the main drag on margins.
- AI‑enabled contracts are becoming a new revenue catalyst.
- Management guidance nudges up FY26 outlook, suggesting a floor under the sector.
- Valuation gaps between Tata‑run and smaller peers create selective buying opportunities.
You’ve been betting against Indian IT, and that could cost you.
Why TCS's Margin Dip Is Not a Red Flag
TCS posted a 14% YoY profit fall to ₹10,657 crore, but the drop is almost entirely a ₹2,128 crore one‑time charge linked to the new labour codes. Its top line still rose 5% YoY to ₹67,087 crore, indicating that the core franchise remains robust. Historically, TCS has weathered regulatory shocks (e.g., the 2018 GST rollout) with minimal long‑term impact on earnings. The current margin compression is therefore a temporary accounting artifact, not a structural weakness.
How Infosys's Revised Guidance Signals Growing Client Confidence
Infosys saw profit dip 2.2% YoY to ₹6,654 crore, again hit by a ₹1,289 crore labour‑code expense. Yet revenue surged 8.9% YoY to ₹45,479 crore and the firm nudged its FY26 revenue growth outlook up to 3‑3.5% in constant currency. This upward revision mirrors the 2022‑23 cycle when Infosys raised guidance after winning several digital transformation contracts, a move that preceded a 12% share rally. The lift reflects a healthier deal pipeline, especially in AI‑enabled services that command higher pricing.
What Tech Mahindra's 14% Profit Rise Means for the Sector
Tech Mahindra defied the profit‑down trend, posting a 14% YoY profit increase to ₹1,122 crore while still absorbing a ₹272.4 crore one‑time labour charge. Revenue grew 8% to ₹14,393 crore, driven by large‑scale telecom and AI integration deals. The company’s ability to expand margins despite regulatory headwinds highlights operational discipline and suggests that peers with similar cost structures could replicate this performance if they secure comparable high‑value contracts.
How AI Adoption Is Reshaping Indian IT Revenue Models
Analysts note a shift toward value‑based pricing as AI projects, though smaller in size, deliver higher productivity gains. This transition mirrors the early‑stage AI adoption seen in the US software sector in 2020‑21, where firms that moved to outcome‑based contracts enjoyed double‑digit margin expansion. In India, the move is already visible: Choice Institutional Equities reports that AI‑led deals now account for roughly 12% of new bookings, up from 5% a year ago. The higher‑margin nature of these contracts should lift overall EBIT margins over the next two fiscal years.
Investor Playbook: Bull vs. Bear Cases for Indian IT Stocks
Bull case: Revenue growth accelerates to 10% YoY as AI‑driven contracts proliferate, profit margins rebound once one‑time labour costs fade, and the sector benefits from a softer USD that improves export‑linked earnings. Valuations compress to 20‑22x FY26 EPS, creating upside of 25‑35% for top‑tier names.
Bear case: Global discretionary spending stays muted, geopolitical tensions curb US demand, and AI adoption stalls, leaving revenue growth stuck around 5% YoY. Margin pressure persists, forcing valuations to linger above 25x and limiting upside to single‑digit levels.
Given the current data, the balance tilts toward the bull scenario, especially for firms with strong AI capabilities and disciplined cost structures. Investors should consider adding high‑quality IT names now, while keeping a watchful eye on macro‑risk indicators such as US corporate capex and the pace of AI project conversion.