Tech outlook: Indian IT firms face margin heat as AI impact meets macro slowdown; companies delay hikes, cut costs and chase deal conversions in negotiator's market

Time of India

4 days ago

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India's top IT firms are grappling with a squeeze on margins amid persistent macroeconomic headwinds and rising pressure from AI-driven productivity improvements, with the first quarter of FY26 reflecting a shift to aggressive internal cost control measures, analysts said.
From deferring pay hikes to trimming sales and admin costs, companies are pulling all levers to sustain profitability as deal momentum remains weak. Experts believe the pressure on margins is unlikely to ease in the near term, even if revenue improves modestly due to pent-up demand, according to an ET report.
'The sector is entering a negotiator's market,' said Nitin Bhatt, technology sector leader at EY India. 'Margin pressures will worsen with investments in new sales and go-to-market motions, solution-building, reskilling, and in some cases, discounts to protect the current estate.'
AI-linked pricing changes are further complicating margin dynamics. 'IT firms are shifting from time & material to outcome-based pricing for AI projects, linking fees to business impact like cost savings or efficiency gains. This may pressure short-term margins but promotes high-value, long-term engagements,' Bhatt said.
Brokerage firm Emkay Research cited HCLTech's management commentary noting generative AI's impact: 25–30% efficiency gains in software development, up to 50% in business processes, and up to 75% headcount reduction in contact centres due to conversational AI.
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For the first time in several quarters, HCLTech revised its margin guidance downward—from 18%-19% to 17%-18%—which analysts flagged as a negative surprise. 'Margin guidance came in as a negative surprise to the Street since HCLT has been keeping margin guidance intact despite changes in revenue target for the past few quarters,' said Elara Capital.
At Tata Consultancy Services (TCS), rising employee costs—due to fresh hiring and mid-quarter benefits—impacted margins by 80 basis points in Q1FY26.
Employee cost now forms nearly 59.45% of TCS's revenue, even as attrition remains elevated at 13.8%.
'FY26 is margin protection and margin expansion year,' said Gaurav Vasu, CEO of UnearthInsight. 'Growth, especially in the US and core verticals, is weak across the board. Large deal wins are not yet translating to revenue acceleration, so lead indicators (pipeline, bookings) matter—but execution and conversion will be critical in H2 FY26.'
Vasu said top-tier IT companies are resorting to tight operational controls, including deferring salary hikes, cutting variable pay, and closely managing bench strength. He forecast modest revenue growth of 3–5% for FY26, with geopolitical risks, US tariffs, and a slowing global economy delaying recovery in client spends.
Stock research firm InCred Equities noted that client delays in finalising long-term digital deals were increasing.
'Deal conversations are underway but advisory-led proposals with long-term roadmaps have complex constructs and are elongating the decision timeframe,' it said.
While the deal pipeline is robust, it remains a 'negotiator's market,' InCred added, where agility and pricing flexibility are critical. Clients continue to demand 'more for less'—optimising legacy spends to fund smaller AI-led projects. This shift is driving vendor consolidation and heightening competitive pressure.
'Building margin expansion for FY26F could be aggressive,' InCred warned, citing tighter client budgets, slower staffing cycles and intense competition.
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