IT services management and investors are talking past each other

A third earnings season in a row has widened the gap between what IT services executives say and what their financial statements show. Managements at Accenture, Infosys, and their peers keep telling investors that AI is a growth driver. The numbers tell a different story.

Infosys reported last week. Accenture reported a month earlier. Both struck the same tone: AI is a tailwind, demand is shifting, the industry is adapting. That script has run for nearly three years without the revenue to back it up.

Anand Mahindra, chairman of Tech Mahindra, tried to bridge the trust deficit at his company's annual general meeting last week. "The role of IT services will not diminish," he said. "It will change. In many ways, it will become more important."

Investors are not buying it. The stock rout across the sector has been relentless. The five largest Indian IT firms – TCS, Infosys, HCLTech, Wipro and Tech Mahindra – together account for roughly 85% of the top-10 industry's revenue. Their combined USD revenue growth over the next two years (FY26-28) is estimated at a CAGR of 1.8, 1.9, 2.7, 0.2 and 3.8% respectively, per Bloomberg consensus. Those numbers are barely above flat.

The sector's share of global technology budgets has shrunk over the past three years. Forecasts suggest it will stay small.

What the last disruption taught investors

The industry's defenders point to the last big technology shift. In the 2010s, IT services moved from legacy outsourcing to digital and cloud. The transition was painful for a few years, then it paid off. The argument is that AI will follow the same arc.

A closer look at the numbers suggests the analogy is weaker than it sounds.

The last 15-16 years split into four phases. Phase one (FY10-15) was the post-financial-crisis outsourcing boom. Phase two (FY15-18) was the digital disruption, when growth slowed. Phase three (FY18-23) was the digital payoff, widely regarded as one of the industry's strongest periods. Phase four (FY23-26) is the AI era.

Phase three, for all its reputation, delivered lower growth and weaker margins than phase one.

TCS revenue CAGR dropped from 26% in FY10-15 to 13% in FY18-23. Infosys fell from 19 to 16%. Across the five largest players, combined revenue CAGR declined from 21 to 13%. Those are rupee figures. In dollar terms the numbers are even softer. Infosys net profit CAGR in phase three, in dollars, was just 4%.

Margins tell the real story

Growth rates can taper as companies get larger. Margins should not. TCS EBIT margins fell from 26% at the end of phase one to 23% now. Infosys went from 26 to 20%. Across every phase, margins have declined.

Compare that with Nvidia. Its EBIT margins moved from 37% in FY22, before the AI boom, to 60% in FY26. That is what rising strategic importance looks like in a P&L.

IT services margins reflect the opposite: higher competition, weak pricing power, and diminishing importance in the technology stack.

The value trap question

The sector trades at what looks like a discount. The question for investors is not whether the stocks are cheap on trailing earnings. It is whether the industry's strategic importance is rising or falling. If it is rising, growth and margins will eventually follow. If it is falling, cheap valuations can stay cheap for a long time.

One path to better margins would be to invest through a period of lower profitability, building capability in the next technology frontier. So far, the companies have shown little appetite for that trade-off.

For now, IT services stocks remain a talking point for value investors. They are not yet a story for growth investors.

AlphaScala data: NVDA (NVIDIA) carries an Alpha Score of 74/100 (Moderate). INFY scores 57/100 (Moderate). ACN scores 38/100 (Mixed).