Domestic IT services firms may experience increasing pressures from AI-driven productivity enhancements, vendor consolidation, and rising insourcing activities, despite continued strong technology spending by global enterprises focused on digital transformation, as reported by Kotak Institutional Equities.
Global banks and financial service institutions are ramping up investments in cloud migration, AI enablement, data infrastructure, and digital transformation. Major firms, including Wells Fargo, JPMorgan, State Street, and Standard Chartered, have indicated a commitment to higher spending on technology modernization and AI integration.
Nonetheless, Kotak cautioned that productivity gains resulting from AI-assisted software development and automation could dampen revenue growth, pricing, and outsourcing demand for IT vendors. The report emphasized that many global companies are already witnessing substantial efficiency improvements from AI-led software development. For instance, HSBC reported a “60 percent acceleration in unit testing,” while Citi noted a “30-40 percent increase in developer productivity.” NatWest mentioned some AI pilot projects delivering “10X productivity gains,” and Citizens Financial indicated that developers might become “5X to 10X more productive” in the future.
These productivity enhancements raise potential deflationary risks for IT service providers, as enterprises increasingly demand cost savings through enhanced software engineering efficiency. Kotak outlined that the downside risk of revenue deflation is particularly pronounced in sectors where clients seek cost efficiencies.
The report also noted an uptick in insourcing activities and the expansion of Global Capability Centers (GCCs) as additional challenges for Indian IT companies. Firms including Charles Schwab, Citizens Financial, PNC Financial, SEI Investments, and Truist are either enhancing in-house technology capabilities or moving select functions back in-house. Many are shifting work from contractors and external vendors as a means to improve efficiency.
Vendor consolidation efforts pose a specific threat to established IT providers, especially when coupled with aggressive pricing strategies or insourcing initiatives. Concurrently, AI adoption is accelerating across various functions such as customer service, compliance, underwriting, fraud detection, and operations, with organizations like Citi, HSBC, TD Bank, and Synchrony Financial integrating AI agents and automation tools to enhance efficiency and minimize manual tasks.
Despite these near-term concerns, Kotak stated that overall global technology spending remains robust, buoyed by investments in AI and modernization initiatives. The report highlights that numerous financial institutions are increasing their technology budgets for 2026, particularly toward AI, cloud migration, infrastructure modernization, and digital capabilities. However, it also noted that a considerable share of this incremental spending is being consumed by rising cloud costs, software inflation, and internal AI investments, limiting the financial advantages for third-party IT service providers.
Kotak further asserted that while AI-led business transformation projects have the potential to create long-term opportunities for Indian IT firms, the revenue impact may take time to realize.
Kotak Institutional Equities maintained a varied stance on Indian IT stocks, favoring select large-cap and niche players while advising caution for those experiencing slowing growth and high valuations. The brokerage retained “buy” ratings on TCS, Infosys, and Tech Mahindra, while issuing “reduce” ratings on HCL Technologies, LTIMindtree, and Mphasis. Wipro was rated “sell.”
In the mid-cap sector, Kotak assigned “buy” ratings to Coforge, Hexaware Technologies, and Indegene, while labeling Persistent Systems, L&T Technology Services, and eClerx Services with “reduce” ratings. Tata Elxsi, Tata Technologies, KPIT Technologies, and RateGain received “sell” recommendations.
The report concluded that valuations for many IT companies are yet to fully incorporate risks stemming from AI-driven productivity disruptions, vendor consolidation, and diminishing outsourcing demand.
