S&P Global Ratings has warned that Indian information technology service providers face heightened competition from AI-native firms over the next three years, a shift that could erode their traditional revenue base unless they keep investing in artificial intelligence and protect their recurring business lines. The ratings agency described AI as a megatrend capable of disrupting the business models that have underpinned India’s IT sector for decades.
According to the report, the credit impact across the industry will be uneven. Large players such as Tata Consultancy Services, Infosys, HCLTech and Wipro are better placed thanks to their scale, diversified service offerings and established relationships across multiple industries and verticals. Their strong cash balances also give them more room to fund AI-related investments and offer competitive pricing than smaller rivals.
The report noted that a prolonged stretch of weak demand and volatile geopolitical conditions has already weighed on these companies, which have posted annual growth of less than 5 per cent for the last three years and may see similar numbers this year. AI adoption is compressing legacy revenue further, since providers must pass on efficiency savings to clients, pushing the market toward larger, slower-to-ramp cost-saving deals rather than the smaller, quicker contracts that once kept growth steady. Discretionary spending has also tightened, with clients directing technology budgets toward AI rather than conventional software products.
S&P said that beyond competing with existing peers, Indian IT companies will increasingly have to contend with AI-native firms — companies built around AI as the foundation of their products rather than as an add-on. These firms can offer clients highly specialised, point-solution software tools, intensifying competition for a market Indian majors have long dominated. The agency cautioned that unless incumbents can match customer demands at competitive rates, high switching costs and constrained client budgets will continue to favour large-scale providers for now, even as weakening customer retention and profitability could pressure some smaller firms.
The report flagged that the most significant disruption may show up in workforce strategy. Infosys, HCLTech and Wipro currently draw about 95 per cent of their revenue from recurring accounts, reflecting a strong track record of customer retention, but AI’s ability to automate lower-skilled coding and testing work means these companies will not need to hire at the pace they did over the past two decades. S&P said this marks a contrast with the cloud migration wave, which increased demand for labour, whereas AI is expected to reduce demand for such roles and could prompt companies to slow hiring or, in some cases, cut headcount as automation tools mature.
Global capability centres offer one cushion against the potential revenue loss, the report said. India now hosts more than 2,000 such centres generating close to $100 billion in revenue, and S&P named Infosys, HCLTech and Wipro as preferred partners for GCCs given their track record, with companies leveraging build-operate-transfer models to strengthen these relationships. To protect operating margins going forward, S&P said IT companies will need to improve staff utilisation rates and invest in upskilling employees, even though this could mean greater reliance on costly subcontractors to fill talent gaps, especially as stiffer competition and limited client budgets make it harder to pass through higher costs than in the past.