India AI and IT Sector Investment Briefing

Executive Snapshot

Investment Bias: Overweight large-cap integrators with Gen-AI stacks; selective preference for captive data-centre REITs and GPU-leasing outfits

Market Size & Composition

Revenue Pools (FY23 actual, revised post-AI breakout)

Note: Cloud s AI share rising from 16% of total (FY22) to 28% (FY26E)

Revenue Growth by Segment

Data & AI Services show the highest growth potential at 28% CAGR, followed by Engineering R&D at 19% and Cloud transformation at 15%. Traditional segments show more modest growth.

Demand Drivers: Secular Trends

·      

• Global digital spend expanding at 7% CAGR (2× slower than previous years)

• Offshore share rising from 41% (FY22) to 47% (FY26E) creating pure volume tailwind

• TCO arbitrage 55-60% vs US staff

• AI tools embedded improve offshore efficiency to 4-labour-hour reduction per developer

• Efficiency gains provide margin cushion for Indian IT firms

Demand Drivers: Cyclical-Tactical

·      

• US budget flush from Infrastructure Act + Chips Act represents 22% of India export invoices

• Sticky inflation keeps on-premise workload re-hosting in play

• Gen-AI copilot requests accelerate instead of cannibalizing existing business

These cyclical factors provide near-term tailwinds for Indian IT service providers, particularly those with AI capabilities.

Competitive Landscape: Major Players

*Includes AI services portion

Mid-cap Focus List

LTIMindtree

• Revenue: US$4.1 bn

• Key Differentiator: 5 new MsAs

• AI Strategy: AI on cloud cost optimization

Persistent

• Revenue: US$1.1 bn

• Key Differentiator: Large IP stake in Snowflake

• Gross Margin: >55%

Zensar

• Revenue: US$0.9 bn

• Key Differentiator: GPU leasing joint lab

• Strength: Deep auto OEM relationships

Regulatory Landscape

Policy Corner

• Digital India Act 2024 (draft): Introduces Data Empathy Board 3 extra compliance cost US$2.3 mn per large provider

• AI Advisory 2024: Non-binding so far, but likely to add bias-audit norm by FY26 3 modeled as 40-50 bps drag on billable rates

• SEBI sandbox: Allows AI-generated stock tips only with risk disclaimers + 3-yr traceability logs

Tax Nuance

20% MAT on AI-driven captive units in SEZs from FY25 sunset replacement
Impact: EBITDA haircut by 120 bps for Tier-1 players

Global Competitive Positioning

Competitive Intensity Map

Conclusion: India is cost-competitive, but faces GPU supply chain lag 3 creating opportunity for domestic datacentre REITs and leasing start- ups

India's Competitive Edge

Talent Pool:  Largest AI-ready workforce globally with 320,000 STEM professionals skilled in AI
Infrastructure Gap: GPU server availability at 38% represents both challenge and investment opportunity
Cost Advantage: 55-60% TCO arbitrage vs US staff with competitive hourly rates of $27/hr
Data Privacy: Moderate-to-strong data privacy framework (3.5/5) providing client confidence

Profit Matrix & FCFF Framework

AI-tooling drives efficiency gains of 1.5-2 hrs per developer ³ +100 bps EBIT margin for every 5% adoption among billing base
AI revenue mix projected to climb to 32% of incremental billable hours by FY26 vs 11% today

The efficiency gains from AI implementation create a virtuous cycle of margin improvement and competitive advantage for firms that successfully integrate these technologies.

FCF & Valuation Summary

Consensus estimates as of April 2024 show attractive FCF yields and growth rates across the sector, with mid-caps like Persistent showing highest growth potential.

Risk Matrix

US Visa Clampdown

• Probability: Medium

• Impact: 3-5% revenue hit

• Mitigant: Localisation, improved remote delivery ratios

Deepfake Liability

• Probability: Low

• Impact: Margin drag

• Mitigant: Tier-1 buying Y1,000 cr cyber- insurance

Rupee 3%-35% Spike

• Probability: High

• Impact: FX tail-wind becomes head- wind

• Mitigant: Hedge ratio ~60% already

Investment Recommendation

Tilt: Large-caps (>US$5 bn cap) where AI spend is a growth lever, not capex blackhole

Overweight: Infosys, HCL Tech 3 early Gen-AI revenue traction, FCF yield >5%
 
Equal-weight: Pure-play AI middle-ware (LTIMindtree, Persistent) 3 volatility premium priced in
 
Trade via: Sector ETF during tax0loss bouts: Nippon India ETF IT (daily AUM US$2 bn)
 
Exit trigger: Sector FCF yield < 4% AND global big-tech capex slowing > 30% YoY

AI Revenue Growth Trajectory

Key AI Revenue Metrics

• Current AI revenue mix: 11% of billable hours

• Projected FY26 AI revenue mix: 32% of incremental billable hours

• Infosys targeting 6x AI revenue in FY24

• TCS investing Y1,500 cr in AI-COE capex over 5 years

The rapid growth in AI-related services represents a significant opportunity for Indian IT firms to capture higher-margin business.

Infrastructure Investment Opportunity

38% Current GPU Availability
India's current GPU server availability rate compared to 75% in China
 
55-60% TCO Arbitrage
Cost advantage vs US staff creating margin cushion
 
28% Data & AI CAGR
Projected growth rate for Data s AI Services segment FY23-26

The GPU infrastructure gap presents a significant investment opportunity for data center REITs and GPU-leasing startups in the Indian market.

Sector Transformation: Traditional to AI-Enabled

By FY26, Cloud s AI share is projected to rise from 16% (FY22) to 28% of total revenue, demonstrating the sector's shift toward higher-growth, higher-margin services.

Key Takeaways

Growth Opportunity:
14-15% CAGR for India AI/IT sector with Data s AI services growing at 28%
 
Competitive Advantage:
World's largest AI-ready labor pool with 55-60% cost advantage vs US
 
Investment Strategy:
Overweight large-cap integrators with Gen-AI stacks; focus on FCF yield >5%
 
Infrastructure Gap:
GPU supply chain lag creates opportunity for data center REITs and leasing startups

Data Sources & Disclosure

Data Sources

• NASSCOM Strategic Review FY24      

• Capitaline database

• BSE research desk filings

• PLI scheme handbook (MoCsI)

• Frost s Sullivan India AI Market Tracker Q1-24

Disclosure

The above report is intended solely for institutional clients authorized to receive regulated equity research. No financial instrument recommendation is made to any retail resident in jurisdictions that restrict same.