A relentless stock rout reflects an unanimously negative market sentiment on IT services stocks.

As another lacklustre earnings season from IT services companies concludes, the contradictions between managements and investors have already been starker.

From global industry leader Accenture, which reported results last month, to Infosys, which reported last week, managements remain steadfast in arguing that AI is a tailwind for the industry, judging by their commentary during earnings calls. They have maintained this view for nearly three years. That none of this optimism has translated into the financial numbers is another matter altogether.

Meanwhile, a relentless stock rout reflects an unanimously negative market sentiment on IT services stocks.

Investors, who initially drank the Kool-Aid after ChatGPT’s launch, are now nursing a hangover, demanding credible proof that AI will actually drive growth for IT services companies.

A week prior, Anand Mahindra, Tech Mahindra Chairman, tried to bridge this trust deficit while speaking at the company’s annual general meeting when he said, “The role of IT services will not diminish. It will change. In many ways, it will become more important.”

However, the evidence points in the opposite direction. IT services have occupied a relatively smaller share of global technology budgets over the past three years, and forecasts suggest that the trend is unlikely to reverse anytime soon.

The USD revenue growth estimate for next two years (FY26-28) for IT majors — TCS, Infosys, HCLTech, Wipro and Tech Mahindra — remains muted at a CAGR of 1.8, 1.9, 2.7, 0.2 and 3.8 per cent, respectively (Bloomberg consensus estimate).

Who is right? To answer that, investors should revisit the industry’s previous disruption and the transformation that followed.

The successful shift from the legacy-focused business to a digital- and cloud-led one in the previous decade is often cited as a proof to convince the naysayers this time. But a closer analysis of the transition indicates there are two sides to it.

The last 15-16 years can broadly be divided into four phases: FY10-15 (Phase 1), when outsourcing accelerated as global corporations cut costs after the global financial crisis; FY15-18 (Phase 2), when the digital and cloud disruption unsettled the industry and growth slowed; FY18-23 (Phase 3), when the transition was largely complete and digital business thrived (Covid notwithstanding); and FY23-26 (Phase 4), when AI has triggered the most disruptive technological shift yet.

While success of the industry in adapting to the structural technology shift in the previous decade is commendable, what also stands out is the impact it has had on growth and margins.

The third phase (FY18-23), despite being regarded as one of the industry’s strongest periods, delivered lower growth and weaker margins than the first. TCS’ revenue CAGR slowed from 26 per cent in FY10-15 to 13 per cent in FY18-23. Infosys fell from 19 to 16 per cent. Across the five largest players — which together account for about 85 per cent of the top-10 industry’s revenue — combined revenue CAGR declined from 21 per cent to 13 per cent.

These are in rupee terms. In dollar terms, the numbers are even more muted (see Charts), indicating how reliant the companies are on currency depreciation for growth. For example, the net profit CAGR for Infosys in the third phase in dollar terms is just at 4 per cent. For companies that address a global market and bill in dollar, these are unexciting growth rates.

Further the phase four comparison versus phase two, indicates the severity of the current disruption.

While an argument can be made that as businesses grow, revenue growth can taper, the rising importance of the companies should have at least reflected in their margins. But across each phase margins have been declining. Across phases, one of the core operating and financial metric — EBIT margins, the industry’s most closely watched metric, have been declining across the board.

TCS EBIT margins have declined from 26 at end of phase 1 to 23 per cent now and for Infosys it has declined from 26 to 20 per cent now. This implies higher competition and lack of pricing power or in other words ‘diminishing importance’.

To understand how rising importance gets reflected in margins is best amplified by the example of Nvidia, where EBIT margins have moved up from 37 per cent in FY22 (pre-AI) to 60 per cent in FY26.

So, as the debate over whether IT stocks are “cheap” continues, investors should focus less on valuations and more on whether the industry’s strategic importance is rising or falling. If its importance is genuinely increasing, it should eventually show up in stronger growth, wider margins — or ideally both. Until then, IT services stocks may remain a favourite talking point for value investors, but they are unlikely to excite growth investors.

Perhaps, the path to better margins lies in taking a hit to margins for a few years by investing in next frontiers of technology. So far, however, companies have shown little inclination to do so.

Published on July 25, 2026