The IT services industry has been “stuck at 2-3% revenue growth over the past three years,” and with the AI contraction “only in year two remaining,” JPMorgan expects “further headwinds to growth over the next two years.”
India’s IT services sector is facing an uncertain demand environment, as artificial intelligence (GenAI)-led productivity gains, geopolitical uncertainty and shifting enterprise spending priorities continue to weigh on growth, with a meaningful recovery unlikely before FY30, according to a research report by JP Morgan, as reported by ANI.The industry faces an unprecedented mix of technology and business cycle headwinds, the brokerage said, warning that companies remain cautious as they reassess technology budgets and investment priorities.The IT services industry has been “stuck at 2-3% revenue growth over the past three years,” and with the AI contraction “only in year two remaining,” JPMorgan expects “further headwinds to growth over the next two years.”Given the uncertainty about the timing of the recovery, the brokerage lowered its medium- and long-term growth estimates and now “does not expect it to happen.”[s] Large-cap companies will achieve mid-single-digit growth and hover around 3-4% revenue growth.
GenAI and geopolitics influence customer spending
“Businesses face fear, uncertainty and uncertainty over changing technology and geopolitics, with technology services budgets crowded out by spending on AI code and the cloud, making the prospects for an industry growth recovery uncertain,” the report said.
Its channel checks cited “delays in ramping up deals and signings due to continued client hesitation due to geopolitical uncertainty and sharp changes in AI,” with weakness likely to “bleed over into Q2FY27.”
The industry is still in the AI “contraction” phase
JPMorgan reiterated that the sector is still in the first stage of the three-stage AI adoption model – contraction – where “AI-led productivity gains in legacy/maintenance-intensive areas… are not fully offset by new AI services.”“A positive reversal is still far away, suggesting that the industry’s growth state may last longer than expected,” the brokerage said, adding that it now expects the recovery “will extend beyond FY29 to FY30, making the near-term growth curve look more L-shaped.”
Growth expectations, lowering valuations
JPMorgan said it cut its first-quarter revenue growth estimates “across the board” and expects to lower its FY27 revenue guidance because “the usual strength in the first half is unlikely to emerge this time around.”Structurally, it no longer expects major IT companies to return to their “long-term average growth of 7% to 8% in the medium term,” and instead expects growth to remain “below 3% to 4% for the foreseeable future.”The brokerage also said it has lowered price-to-earnings multiples by 10-25% across the sector, arguing that current valuations are justified as “structural growth is stuck at below 5% now versus 7-8% previously.”For valuations to improve, JP Morgan said it would need to “see revenue growth accelerate where visibility and confidence are lower.”