Domestic IT services companies could face rising pressure from AI-led productivity gains, vendor consolidation and growing insourcing trends even as global enterprises continue to spend aggressively on technology and digital transformation, according to a report by Kotak Institutional Equities.
Global banks and financial services companies continue to increase investments in cloud migration, AI enablement, data infrastructure and digital transformation. Companies including Wells Fargo, JPMorgan, State Street and Standard Chartered indicated higher spending on technology modernisation and AI adoption.
Still, Kotak warned that rising productivity gains from AI-assisted software development and automation could pressure revenue growth, pricing and outsourcing demand for IT vendors.
AI-led productivity gains emerge as key risk
The report highlighted that several global firms are already seeing significant efficiency gains from AI-led software development.
HSBC reported “60 per cent speeding up in unit testing,” while Citi said AI-driven development had resulted in a “30-40 per cent boost in developer productivity.” NatWest said some agentic AI pilots were delivering “10X productivity gains,” while Citizens Financial said developers could become “5X to 10X more productive in a future world.”
Kotak said these productivity improvements raise the risk of revenue deflation for IT services companies, particularly as enterprises increasingly demand AI-led cost savings from vendors.
“Downside risk of deflation is higher in business with clients who want to realise cost efficiencies from improvement software engineering productivity,” Kotak said.
The report added that many global firms are now looking to consolidate vendors, renegotiate outsourcing costs and reduce third-party spending as AI adoption improves internal productivity.
GCC expansion, insourcing trends add pressure
Kotak also flagged rising insourcing activity and expansion of global capability centres (GCCs) as emerging headwinds for Indian IT firms.
Companies including Charles Schwab, Citizens Financial, PNC Financial, SEI Investments and Truist are expanding internal technology operations or insourcing select functions. Several firms are also shifting work away from contractors and external vendors to improve efficiency.
The brokerage said vendor consolidation initiatives could particularly hurt incumbent IT providers if accompanied by aggressive pricing cuts or insourcing.
At the same time, AI adoption is accelerating across customer service, compliance, underwriting, fraud detection and operations. Firms such as Citi, HSBC, TD Bank and Synchrony Financial are deploying AI agents and automation tools across business functions to improve efficiency and reduce manual intervention.
Technology spending remains healthy
Despite the near-term risks, Kotak said overall global technology spending trends remain healthy, supported by AI investments and modernisation programme.
The report noted that many financial institutions continue to increase technology budgets in 2026, with spending directed toward AI, cloud migration, infrastructure modernisation and digital capabilities.
However, the brokerage cautioned that a significant portion of incremental spending is being absorbed by cloud costs, software inflation and internal AI investments, limiting the benefit flowing to third-party IT service providers.
Kotak added that AI-led business transformation projects could create long-term opportunities for Indian IT firms, although the revenue contribution may take time to scale meaningfully.
Brokerage calls and valuations
Kotak Institutional Equities maintained a mixed stance on Indian IT stocks, preferring select largecaps and niche players while remaining cautious on companies facing slowing growth and expensive valuations.
Among largecaps, the brokerage retained ‘buy’ ratings on TCS, Infosys and Tech Mahindra, while maintaining ‘reduce’ on HCL Technologies, LTIMindtree and Mphasis. Wipro was rated ‘sell’.
In the midcap space, Coforge, Hexaware Technologies and Indegene were rated ‘buy’, while Persistent Systems, L&T Technology Services and eClerx Services were assigned ‘reduce’ ratings. Tata Elxsi, Tata Technologies, KPIT Technologies and RateGain carried ‘sell’ recommendations.
Kotak said valuations for several IT companies still do not fully factor in risks from AI-led productivity disruption, vendor consolidation and slowing outsourcing demand.