New Delhi, Dec 9 : The Indian IT services industry is expected to pick up to 6-7 per cent in FY26, from 3-4 per cent in the past two years, led by a recovery in the US market, HSBC Research said on Monday.

Tech adoption of generative AI (GenAI) has been faster in 2024 compared to business GenAI.

'We expect business GenAI projects to pick up by next year. Finally, global capability centres (GCCs) continue to grow and take market share from Indian IT, but these gains are moderating,' HSBC Research said in its 'Outlook for 2025' report.

Most operating metrics -- utilisation, offshore mix -- are at peak levels, so as growth improves margin pressure is likely to increase next year.

'We think the key here is to adjust the pyramid - the corporate staff structure - by hiring younger engineers to reduce costs. However, this is a long process and is unlikely to be immediately margin accretive,' said the report.

'Overall, we expect the IT sector to perform at least in line with market in 2025. Improving growth should attract investor interest away from some other sectors, where the demand outlook is deteriorating but valuations are high,' the report mentioned.

Within IT, when it comes to stock selection, it's a case of balancing growth and valuations.

'We are less constructive on mid-tier companies as their growth is decelerating but valuations remain rich,' said the report, upgrading Infosys and LTI Mindtree to 'Buy' and Wipro to 'Hold'.

'Our preferred picks are Infosys (Buy), LTI Mindtree (Buy), HCLT (Hold), and MphasiS (Buy),' it added.

HSBC Research predicted weaker outlook for Europe, GenAI uncertainty and headwinds from global capability centres to restrict upside.

'The US demand outlook is positive, led by an improving macro backdrop, especially for banking and retail, and supported by a low base,' the report mentioned.

In Europe, demand is weakening, offsetting some of the upside from the US market.

'From a broader perspective, unlike the last three mega upcycles since 2009, we don't see any powerful new business or tech drivers,' the report noted.

/IANS