Indian IT services earnings reveal “compression” pressure, but AI has not yet disrupted the industry model
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Indian IT services earnings reveal “compression” pressure, but AI has not yet disrupted the industry model
Bernstein believes the recent weakness in Indian IT services company earnings has been driven more by macro uncertainty, tighter client budgets, and the exit from lower-value revenue streams than by AI substitution; European peers may perform relatively more steadily due to their business mix and lower valuations.
- Of the 13 Indian IT services companies tracked over the past two weeks, 10 have already reported March-quarter earnings, and most saw their share prices fall on the release day.
- The report emphasizes that the slowdown in industry growth is mainly due to the macro environment, cautious client spending, and uncertainty caused by the Middle East conflict, rather than direct destruction of the IT services business model by AI.
- AI-related discussion was more specific than in previous quarters, and some companies quantified the deflationary impact, but the core view remains that AI will bring incremental revenue and will not dilute margins.
- Leading Indian companies have begun to exit low-value revenue streams more explicitly or reduce traditional highly competitive contracts, which depresses short-term revenue growth but also reflects the industry's shift toward higher value-added business.
- Bernstein expects European IT services companies to disappoint investors less than their Indian peers, due to fewer client headwinds, a gradual recovery in investment from some sectors that were weak in 2025, and a lower starting EV/EBITDA multiple.
Report interpretation
Overview
This report is Bernstein’s summary of recent quarterly earnings from Indian IT services companies and compares them with European IT services companies that are about to report. The report covers 10 Indian IT services companies that disclosed earnings over the past two weeks and notes that share price reactions were generally weak due to soft quarterly data, the lack of sufficiently strong FY27 growth targets, geopolitical uncertainty affecting the outlook, and elevated pre-earnings valuations. The report’s core keyword is “compression”: revenue growth, client budgets, traditional low-value businesses, and valuation expectations are all being compressed.
Core views
Bernstein’s core view is that the current weak growth of Indian IT services companies mainly stems from the macro environment and the client spending cycle, rather than AI disrupting the industry’s economic model. AI’s deflationary effect is real, especially in compressing some traditional services revenue, but the report believes AI will also drive new projects and new revenue and will not systematically weaken IT services companies’ margins. Performance divergence within the industry is pronounced, with the quality of client mix, the criticality of business lines, the share of low-value revenue, and the delivery ramp-up pace of large deals becoming key factors that distinguish winners from losers. For European peers, the report is relatively optimistic, arguing that their business mix is different, client headwinds are fewer, there is room for recovery in investment from sectors that were weak in 2025, and valuations are significantly lower than those of Indian peers, so even low-single-digit revenue growth could support valuation recovery.
Analysis framework
The report uses a cross-sectional earnings comparison and thematic attribution approach: it first looks at Indian IT services companies’ share price performance on and after release dates, then compares revenue growth, bookings, EV/EBITDA, sales per employee, deal structure, and company guidance; it then explains industry divergence through dimensions such as AI, the macro environment, the Middle East conflict, SAP migration, client concentration, exits from low-value businesses, and the delivery ramp-up pace of large deals, and extrapolates these findings to the potential earnings performance of European IT services companies.
Methodology notes
Compare the quarterly earnings, bookings, valuations, and management commentary of multiple Indian IT services companies horizontally to identify common industry trends and company-specific differences.
This framework is suitable for determining during earnings season whether industry fundamentals are being driven by common factors such as the macro spending cycle, AI impact, or company-specific client mix issues.
Use EV/EBITDA, adjusted P/E, and relative valuation starting points to compare Indian and European IT services companies.
The report notes that Indian IT services companies had higher pre-earnings valuations, while European peers had lower EV/EBITDA starting points, so European companies may achieve valuation recovery even with lower revenue growth.
On the one hand, AI compresses traditional service hours and low-value revenue; on the other hand, it creates demand for deployment, consulting, engineering, and transformation projects.
The report argues that AI’s impact on the industry is not simple substitution, but rather a catalyst for upgrading the revenue mix; the deflationary effect is real, but not enough to negate the industry’s long-term growth potential above GDP.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Indian IT services companiesCore subjects of analysis
- Strengths
- Overall order intake remains decent, AI projects have already become a reality, and the industry’s long-term growth potential may still exceed GDP.
- Weaknesses
- Short-term growth visibility is limited, FY27 guidance lacks a strong rebound signal, revenue from some large clients is declining, and exits from low-value revenue are dragging on growth.
- Comparison
- Compared with European peers, Indian companies had higher pre-earnings valuations, making their share prices more sensitive to disappointment when growth slows.
- Risks
- Deterioration in the macro environment, the Middle East conflict dragging on investment decisions, delayed SAP migration projects, uncertainty in the delivery ramp-up pace of large deals, and AI deflation exceeding expectations.
- European IT services companiesBenchmark and potential beneficiaries
- Strengths
- Their business mix differs from Indian peers, key clients may face fewer headwinds, some sectors that were weak in 2025 have room for gradual investment recovery, and the EV/EBITDA starting point is lower.
- Weaknesses
- They are still exposed to the IT spending cycle, the AI deflation narrative, and investor skepticism about long-term terminal value.
- Comparison
- Bernstein expects European companies to disappoint investors less than Indian peers, and even low-single-digit revenue growth could support an improvement in valuation multiples.
- Risks
- If management commentary on AI, orders, and client budgets is as cautious as that of Indian peers, valuation recovery may be delayed.
- WIPRO LTD (WIT.US)Representative Indian IT services company
- Strengths
- The report tracks its order intake, and booking data excluding large deals is used to observe underlying demand.
- Weaknesses
- Indian IT services as a whole face revenue growth compression, cautious client budgets, and competitive pressure in traditional businesses.
- Comparison
- Compared with covered European IT services stocks, Indian IT services companies overall had higher valuations and growth expectations before earnings.
- Risks
- Insufficient transparency in order mix, uncertainty over the ramp-up timing of large deals, and AI’s deflationary impact on traditional revenue.
- CapgeminiCovered European IT services stock
- Strengths
- The table shows an Outperform rating, with the target price significantly above the closing price; European peers start from lower valuation levels.
- Weaknesses
- It remains exposed to the corporate IT spending cycle and long-term repricing pressure on service models from AI.
- Comparison
- The report expects European IT services companies to disappoint less than Indian peers.
- Risks
- Disclosures show that Bernstein or its affiliates had investment banking or securities-related service relationships with Capgemini in the past twelve months, and investors should pay attention to potential conflict-of-interest disclosures.
Key data
- Coverage of Indian IT services earnings disclosures10 of the 13 tracked companies have already reported March-quarter earningsThe report analyzes disclosures by Indian IT services companies over the past two weeks.
- Share price reaction on release dayOnly 1 stock rose, while 9 fellThe section heading shows that most Indian IT services companies faced share price pressure on earnings release day.
- Revenue scale of large Indian IT services companiesRevenue exceeds USD 10 billionThe report notes that major Indian IT services companies are large in scale and their clients are not highly concentrated, but declining revenue from some top clients still poses pressure on growth targets.
- Date of valuation table for covered European stocks2026-04-27The report’s table lists ratings, closing prices, target prices, adjusted EPS, and valuation multiples for European IT services companies.
- Capgemini rating and target priceOutperform, target price EUR 208.00, closing price EUR 101.60From the Bernstein ticker table; one of the covered European IT services stocks.
- Atos rating and target priceUnderperform, target price EUR 43.00, closing price EUR 34.20From the Bernstein ticker table.
- Bernstein equity rating distributionOutperform 51.1%, Market-Perform/Neutral 36.3%, Underperform 12.6%Global rating distribution disclosed in the appendix as of 2026-03-31.
Impact & implications
For investors, the report suggests that the recent weak earnings of Indian IT services companies should not be simplistically attributed to AI disruption; instead, factors such as slowing macro demand, the quality of client mix, exits from low-value revenue, and excessive valuations should be distinguished. AI is more likely to cause a redistribution of the revenue mix and compression in pricing/hours for traditional services, rather than immediately destroying the industry model. If European IT services companies can demonstrate recovering client budgets, incremental AI-related business, and stable margins, their lower valuations may offer a rerating opportunity; conversely, if European companies also show declining revenue from large clients, delayed SAP projects, or unclear order conversion, the market may continue to compress terminal value assumptions.
Risks
- The Middle East conflict and deterioration in the macro environment could delay corporate IT investment decisions, especially creating greater pressure in the second half of 2026.
- AI’s deflationary effect could exceed management expectations, compressing traditional services revenue and pricing.
- If the market expects the SAP ECC support deadline to be postponed, SAP migration projects may be paused or delayed.
- Large-deal bookings lack sufficient granularity, and there is uncertainty between renewals and new business, ACV and TCV, and contract signing and revenue ramp-up.
- Declining revenue from some large clients indicates that client mix quality and business criticality remain major risks.
- Exiting low-value revenue streams and reducing traditional competitive contracts may continue to drag on revenue growth in the short term.
- Indian IT services companies had high pre-earnings valuations, so the risk of valuation compression is greater when growth slows.
- If European peers cannot prove demand recovery and incremental AI revenue, the low-valuation recovery thesis may fail.
What to watch
- Whether the upcoming quarterly earnings of European IT services companies are indeed less disappointing than those of Indian peers.
- Management’s quantified commentary on incremental AI revenue, the extent of AI deflation, and the impact on margins.
- Whether FY27 growth targets indicate a genuine rebound rather than merely providing a wide scenario range.
- Whether more cases of SAP migration projects being paused or delayed emerge.
- The granularity of disclosures on renewals, new business, ACV, TCV, and the ramp-up pace of large deals within order data.
- Changes in revenue from large clients, especially the drag from the top five clients on overall growth.
- The impact of low-value revenue exits, declining pass-through revenue, and increased offshore delivery on reported revenue growth.
- Whether EV/EBITDA multiples of European IT services companies recover after delivering low-single-digit growth.