IT Services Sector Witness Lack of Urgency to Spend by Clients: InCred Equities

Entrepreneur

20 hours ago

Clients continue to seek 'doing more for less' to optimize legacy projects to fund small-ticket AI-led ones
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Indian IT services companies are witnessing a lack of urgency to spend by clients as they remain cautious in an uncertain business environment, and are still hesitant to take long-term decisions, according to a report from InCred Equities.
"But the reconciliatory stance, especially on reciprocal tariffs, has helped de-escalate the situation. Deal conversations are underway but advisory-led proposals (RFPs) with long-term road-maps have complex constructs and are elongating the decision timeframe. Pipeline opportunity could be at its peak but the pertinent question for investors is the quantum of conversion book and rate," the report said.
However, enterprises are using the current uncertainty to right-size their organization/spending, given the inflationary pressure. The global conflicts have impacted client visits to Centres of Excellence (CoEs) and has elongated deal closure.
The India-Pakistan conflict impacted travel plans of clients. "We heard instances of less client meetings in the month of May 2025 as travel advisory led to cancellation or postponement of visits to CoEs in India. This, in turn, added a new vector to decision-making delay, especially for global capability centre or GCC-led deals," the report said.
AI-led productivity is the big elephant in the room. According to InCred Equities, the deflationary impact of artificial intelligence (AI) on revenue, led by productivity pass-back, is unlikely a near-term phenomenon. "We have been highlighting that clients continue to seek 'doing more for less' to optimize legacy projects to fund small-ticket AI-led ones. This, in turn, is driving vendor consolidation, driving the competitive intensity higher, creating staffing challenges, and pressurizing the margin profile of deals. Hence, building margin expansion for FY26F could be aggressive."
As economic downturns change technology adoption and consumption patterns, this cycle is likely to favour mid-sized IT companies. The report cites similar views from CEO of Zensar Technologies who believes tier-II have the opportunity to capture incremental mind and market share as the current technology (AI) change has made the field level-playing.
Infosys Chairman Nandan Nilekani alluded to the uncertain business environment in its latest annual report. "As we contemplate the developments of the last few months, we know we are in an era of uncertainty that we have never seen before. Multiple trends are colliding and leading us to reexamine the fundamentals of our businesses," he said.
N. Chandrasekaran, Chairman, Tata Consultancy Services (TCS) also agreed that financial year 2025 was a year of profound global disruption. "Widespread geopolitical conflicts, military escalations, and uncertain trade dynamics severely impacted global supply chains. Over 60 nations went to the polls, stalling policy continuity and reform agendas across several key markets. As a result, businesses worldwide faced significant shocks— ranging from falling production volumes and rising costs to suboptimal asset utilization, impacting profitability and cash flows," he said in the company's latest annual report.
The InCred Equities report indicated of a potential budget flush in 2H FY26F, given the current procrastination in spending, delay in decision-making and/or ramp-ups, and tepid spending pattern in 1H CY25. "That said, it may not be a true reflection of structural recovery as AI-led deflationary pressure could outweigh the near-term tailwinds, if any," the report said.
The demand trend across banking, healthcare, energy, mining, and insurance verticals appear to be better than manufacturing, hi-tech, and retail. "That said, there appears to be no real urgency to spend, even within the segments having a better demand trend."