AI-led execution offers a breather for mid-sized IT firms amid muted demand

The Q3 FY26 earnings of India’s mid-sized IT services companies offered at least some positive signals amid an otherwise cautious demand environment, with artificial intelligence emerging as a key stabiliser for deal pipelines even as revenue growth remained modest.

Companies such as LTIMindtree, Coforge, Persistent Systems, Mphasis, Zensar Technologies, Cyient, Birlasoft, KPIT Technologies, Tata Elxsi and Sify Technologies reported low single-digit sequential growth or largely flat revenues in Q3 FY26, reflecting continued restraint in global enterprise technology spending. However, management commentary across earnings calls pointed to a clear shift in client behaviour: AI spending is increasingly moving from experimentation to execution-focused transformation programs.

Persistent Systems said enterprises are now scaling GenAI deployments across core technology estates. Chief executive Sandeep Kalra said on the Q3 earnings call that clients are “moving beyond pilots and proofs of concept to production-scale deployments,” with AI increasingly embedded into application modernisation, data platforms and digital engineering engagements. While AI may not always be contracted as a separate revenue line, the company said it has become central to strategic deal conversations.

At Coforge, management highlighted steady traction from AI-infused transformation deals, particularly in BFSI and travel. Chief executive Sudhir Singh said clients are prioritising AI investments with clearly defined productivity and efficiency outcomes, adding that AI capabilities have effectively become a qualifier in most large deal pursuits rather than an optional add-on.

LTIMindtree echoed similar trends, with enterprises remaining cautious on discretionary spending but selectively investing in core transformation programs. Chief executive Debashis Chatterjee said spending during the quarter was focused on areas where AI can materially improve operational efficiency and platform performance, with demand holding up better in cloud, data and AI-led modernisation initiatives.

Mphasis also flagged AI-enabled modernisation as a key demand driver in Q3. Chief executive Nitin Rakesh said enterprises, particularly in banking and financial services, are deploying AI to simplify and rationalise complex legacy technology estates as part of broader cost optimisation efforts, rather than pursuing expansive digital transformation programs.

Engineering-led firms continued to see sector-specific AI traction, underscoring the importance of vertical depth among mid-sized players. KPIT Technologies said its performance was supported by sustained demand for AI-led software and systems engineering in the automotive sector. Managing director and chief executive Kishor Patil said AI is becoming foundational to software-defined vehicle architectures, driving continued client investments despite broader macro uncertainty.

Tata Elxsi highlighted rising adoption of AI across automotive design, embedded systems and media workflows. Chief executive Manoj Raghavan said clients are increasingly scaling AI across product development and content pipelines to improve design efficiency and accelerate time-to-market.

Cyient said AI adoption is gaining traction across aerospace, manufacturing and infrastructure engineering programs. Chief executive K Krishna Bodanapu said enterprises are deploying AI to improve design efficiency, asset performance and execution timelines, particularly in large, long-duration engineering engagements.

While large, headline-grabbing mega deals remained limited during the quarter, several companies pointed to healthier pipelines of mid-sized, multi-year contracts, often structured in phases with AI embedded across delivery. Zensar Technologies and Birlasoft said deal wins in Q3 were characterised by smaller initial contract values but longer engagement visibility, as enterprises adopt a cautious, outcome-driven approach to AI deployment.

AI is also beginning to influence operating metrics. Sify Technologies said increased use of AI-driven operations, automation and cloud optimisation tools helped improve service efficiency during the quarter. CFO commentary across firms suggested that internal adoption of AI-assisted delivery models is helping support margins amid pricing pressure and wage inflation.

Industry watchers say the Q3 earnings season reflects a structural shift in enterprise technology spending. GenAI adoption is increasingly being tied to core business workflows rather than innovation budgets, favouring mid-sized IT firms with deep vertical expertise and faster execution capabilities.

Equity research analyst Prathamesh W believes that AI is no longer an experiment for Indian IT. It is being embedded into core transformation budgets even as overall IT spending remains cautious,” brokerage Jefferies. According to him, for mid-sized IT firms, this shift plays to their strengths—vertical depth, faster execution and the ability to integrate AI into ongoing programs. While growth may stay modest in the near term, AI-led deals are improving pipeline quality and visibility.”

“Q3FY26 made one thing clear: while discretionary tech spending remains cautious, AI has moved from PoCs to scaled, ROI-led deployments across clients,” he added.

Taken together, the December quarter suggests that AI is no longer a future-facing narrative for India’s mid-sized IT services companies, but a foundational element shaping deal pipelines, delivery models and client expectations. While near-term growth remains incremental, the transition from experimentation to execution-led AI spending could offer greater resilience and revenue visibility for the sector over the coming quarters.