New Delhi [India], November 12 (ANI): India's IT services sector is gradually moving beyond concerns over artificial intelligence (AI) disrupting traditional business models, with investors now focusing on revenue stabilization and the ability of companies to deliver sustainable growth, according to a report by Kotak Institutional Equities.

The shift in market sentiment comes despite a mixed performance in the second quarter of FY27, with demand remaining subdued and revenue growth among large IT companies staying at low-single-digit levels.

The report said results for Tier-1 IT companies were middling, with their year-on-year organic revenue growth declining to low-single-digit levels. Mid-tier companies performed relatively better, although some also missed headline expectations.

However, IT stocks have performed well despite the moderate quarterly results, as the market's discussion around the sector has changed.

'The sector discussion has shifted from the relevance of the model to revenue stabilization and now to sustainable growth,' the report said.

According to Kotak, concerns about the long-term relevance of IT services companies in an AI-driven business environment have eased.

The establishment of forward-deployed engineering (FDE)-led organisations by frontier model labs has reinforced the need for IT services companies in helping enterprises adopt AI.

The report said improving deal activity and selective resumption of hiring are also providing some support to the sector, although overall demand remains subdued.

Another important factor has been the ability of companies to maintain their margins despite competitive pressure and the need to invest in AI capabilities.

Margins held up reasonably well across most companies and even surprised positively, despite new contracts being dominated by price-sensitive cost take-out services and companies having to invest in AI capabilities.

The report stated that margins would remain an important factor in sustaining valuations and could face a test over the next two to three quarters.

The report also highlighted that IT companies are becoming more realistic about the impact of AI-led deflation on their businesses. Companies are increasingly discussing whether new work and revenue opportunities can offset the pressure from lower pricing and productivity gains.

However, the report remains cautious about the outlook, as improvements in AI model capabilities could increase deflationary pressure even as new use cases expand the addressable market.

The report noted that the recent rally in IT stocks partly reflects a reversal of the anti-AI trade but also points to a more fundamental improvement in investor perception. (ANI)