India's IT services firms are fighting a war on two fronts: outmuscling one another to win large deals while absorbing the ballooning hardware costs that come with them.
At least two chief executives said the rising hardware costs were to be tracked, with one of them even expressing reluctance to give blanket discounts on IT deals to protect operating margins.
Large deals have always carried the risk of lower profitability than a company's overall margins. In the past, companies largely offset this by deploying executives in low-cost locations and recovering the losses during the initial phase of the contract.
However, rising hardware costs have disrupted that playbook. The timing could hardly be worse, with automation tools forcing IT services companies to deliver ever-deeper cost savings on ever-smaller contracts, even as geopolitical tensions push clients to tighten technology budgets and focus on their core businesses.
Changing terms
Tech Mahindra Ltd's chief executive officer (CEO), for one, is refusing to take the hit. “As you know, memory prices and chip prices are increasing significantly, and we are not willing to guarantee those for the customer,” said Mohit Joshi, during the company's post-earnings analyst call on 16 July.
Selling services at yesterday's prices, he added, is not on the table. “If you're seeing a pricing inflation of 20% year-on-year, to tell clients that you will hold the price for a three- or a five-year deal, we think is a forward call, which doesn't really make sense,” added Joshi.
A second CEO is watching the same numbers, less certain of the answer. LTM Ltd's Venu Lambu said memory prices remain unresolved when asked about the delayed ramp-up of business from the income tax department.
“Yes, whatever is the delay ramp up, I am expecting it to start ramping up in Q2, but the larger issue about hardware, shipment timelines and the memory prices is something that, that we still need to see how to navigate over the next one or two months, but whatever has got delayed from a Q1 perspective, I expect that to appear in Q2,” said Lambu, during the company's post-earnings conference call on Monday.
In January, LTM bagged a $330 million contract from the country’s income tax department to modernize its software with AI features. This business is now deferred because of memory chip constraints due to the West Asia war, according to Lambu.
AI models use heavy processing power to generate results. While graphic processing units (GPUs) are the brains behind the AI model, memory chips store the output. Both are essential in running any AI platform.
However, memory chip prices have been rising as data centre operators stockpiled supplies in anticipation of future demand, leading to shortages.
Tech Mahindra and LTM ended the April-June 2026 period with $1.66 billion and $1.22 billion in revenue, respectively, up 2.2% and 0.1% sequentially.
A challenge
These unforeseen costs are creating unique challenges for IT services companies.
“IT services companies face a difficult negotiation, especially with existing clients, if such unforeseen cost increases happen. They have to absorb the costs but mitigate the damage on margins by increasing productivity and pass on more efficiency gains by actively leveraging AI to deliver,” said Namratha Dharshan, chief business leader at IT research and advisory firm ISG
Dharshan added that newer contracts bake in these unforeseen costs.
While this may prompt IT services companies to ask for a revision on their existing contracts each year, a second analyst said they are not in a position to foresee such costs and dictate terms to clients.
“Most large IT services firms are not in a strong position to reopen long-term contracts purely because GPU or memory costs have increased. The market remains highly competitive, and most providers are absorbing these costs in the short term while selectively passing them through in newer AI-specific engagements,” said Phil Fersht, CEO of business research consultancy HFS Research.
He added that companies will have to take the margin hit. “There will be some short-term margin pressure as providers invest heavily in AI infrastructure, engineering talent, and platform development before revenue fully catches up,” said Fersht.
An opportunity
While two companies are monitoring the availability and cost of memory chips, another is using them as an opportunity.
The third-largest Indian IT player HCL Technologies Ltd is investing $350 million in building and running data centres with a total capacity of 50 megawatts, making it the second tech services company after Tata Consultancy Services Ltd to enter into the data centre space.
CEO C. Vijayakumar attributed this move to low demand for chips during a 13 July analyst call.
“Yeah, I think even now the market is heavily GPU starved, there is no ambiguity at all. And the reason some of the big companies are renting out GPU capacity is it's very lucrative to rent out GPU capacity, said Vijayakumar.
HCL Technologies ended last quarter with $3.65 billion in revenue, down 0.9% sequentially.