A new CLSA report highlights that AI will evolve into a key growth engine for the Indian IT sector by FY31, helping to offset current revenue deflation. While the brokerage has lowered ratings for several large-cap IT firms due to ongoing macroeconomic challenges, it retains a positive view on select mid-tier players like Persistent Systems and Coforge.
A recent analysis from CLSA suggests that the Indian IT services sector is entering a pivotal transition phase. While Artificial Intelligence (AI) is currently acting as a drag on revenue due to automation-led productivity gains, the brokerage expects AI to become a net growth driver for the industry by fiscal year 2030. The report forecasts that US-dollar revenue growth for the sector will reach mid- to high-single digits by FY31, with a clearer inflection point for growth likely to emerge within the next 18 to 24 months.
The AI Spending Transition
The central challenge currently facing IT firms is that productivity improvements often lead to lower billable hours, creating short-term revenue deflation. However, CLSA notes that this trend will shift as the volume of AI-driven projects scales up. The research firm estimates that generative AI's share of overall IT services spending is poised to double, reaching 11% by 2029. This transition is expected to create new opportunities as clients increase their budgets for AI applications, software platforms, and related technology services.
Diverging Outlooks for Large and Mid-Cap Firms
CLSA’s assessment of the sector highlights a contrast between large-cap companies and select mid-tier firms. As of August 19, 2026, the brokerage has downgraded several major IT stocks. Tata Consultancy Services (TCS), Infosys, and Tech Mahindra have been downgraded to a 'Hold' rating, while Wipro and Mphasis have been placed under an 'Underperform' rating. The brokerage cites limited upside potential and ongoing structural pressures as reasons for this cautious stance on larger players.
In contrast, the report maintains a 'High Conviction Outperform' view on Persistent Systems and Coforge. These companies are viewed as being better positioned to navigate the current shift in the AI landscape, potentially allowing them to capture growth earlier than their larger counterparts.
Managing Industry Risks
Despite the long-term optimism regarding AI, the report flags significant near-term risks that investors should track. The IT sector continues to face headwinds from sluggish macroeconomic conditions, which are curbing client discretionary spending. Furthermore, increased competitive intensity remains a hurdle. There is also the risk that IT services providers could lose market share in global AI spending to hardware and software-focused companies if they cannot scale their AI-driven demand rapidly enough.
For investors, the next critical update will be how quickly companies can convert AI pilot projects into revenue-generating, large-scale contracts. Monitoring volume growth trends, margin stability, and management commentary on client spending patterns will be essential to gauge when the sector's shift from productivity-led deflation to AI-led expansion takes full effect.