In an interview with CNBC-TV18, Shah remarked that hopes for a recovery within the next 12–18 months could be overly optimistic, considering the magnitude of transformation needed. “This necessitates a complete reorientation. How can you realign hundreds of thousands of employees? How do you modify the cultural traits developed over 30–40 years? I’m uncertain if large companies can accomplish this in such a limited timeframe,” he stated.
He warned that inertia within large organizations could hinder adaptation, despite the rapid pace of AI advancements. “Often you don’t have an alternative, but inertia is influential. The AI shift isn’t new; it’s merely more pronounced now,” Shah elaborated, noting that the challenges in the sector’s growth existed before the current disruption.
Referencing historical patterns, he pointed out that growth among major IT firms has been sluggish, despite robust digital demand. In the last three years, Infosys’s growth has hovered around 7% in rupee terms, equating to roughly 2–3% in dollar terms, whereas 10-year growth has averaged about 5% in dollars. “The problem with IT isn’t the business model; it’s a lack of growth,” he noted, underscoring that this has caused a consistent decline in the sector’s valuation.
Shah further indicated that the markets are increasingly favoring sectors with clearer growth potential, like power utilities tied to data center demand, while IT continues to lag behind. He emphasized that without a return to double-digit growth, a sustained re-rating of the sector would be unlikely.
From a structural standpoint, Sumeet Jain, Senior Research Analyst at CLSA India, stated that short-term visibility remains muddied by an emerging deflationary trend influenced by AI. “Globally, IT services spending has sustained a growth rate of 3–4% over the last two decades,” he commented, mentioning that Indian firms have also seen a decline in market share momentum post-pandemic.
Jain pointed out the swift ascent of Global Capability Centres as a significant obstacle, as multinational corporations are increasingly developing in-house capabilities instead of outsourcing to traditional IT vendors. He added that while optimism around AI has been somewhat driven by gains in chipmakers, the advantages have predominantly benefited software firms like OpenAI and Anthropic rather than the broader IT services industry.
“The crucial question is whether AI will drive deflation or incremental volume growth,” Jain stated, indicating that the sector is shifting towards a “services as software” paradigm, where delivery increasingly relies on AI.
Both experts stressed that earnings growth will remain central to determining valuations. Jain remarked that firms open to passing on productivity gains to clients and actively pursuing market share are better poised in the current cycle. He mentioned Persistent Systems and Coforge as preferred choices, citing their more robust growth prospects and deal momentum.
Meanwhile, Shah noted that companies are facing difficult decisions between investing in AI capabilities and preserving short-term profitability. “Companies are ‘damned if they do, damned if they don’t’,” he said, encouraging leadership to adopt a long-term perspective even if short-term market reactions are unfavorable.
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He added that significant transformation may necessitate moving away from established structures. “I would pinpoint specific segments within the organization… and develop AI capabilities around them. If necessary, I would separate these units to allow them to grow without legacy limitations,” Shah advised.
Regarding investor sentiment, Jain mentioned that a renewed emphasis on innovation and increased research and development expenditure will be vital for attracting foreign investment back into the sector, as companies aim to reposition themselves in an AI-driven technological landscape.
