Synopsis: Analysts diverge on AI’s impact on Indian IT. Motilal warns of revenue risks from automation, Macquarie sees disruption as overstated due to complex enterprise systems, while Jefferies highlights potential threats to application services, urging selective investment.
The emergence of AI tools like Anthropic’s Cowork plug-ins is sparking debate over their potential impact on the Indian IT sector. These technologies, designed to streamline enterprise operations, are reshaping traditional software usage and challenging established IT service revenue models.
Motilal Oswal Flags AI and Automation Risks for Indian IT
The impact of AI on the Indian IT Services industry is becoming more evident as the recent global tech sell-off has affected the valuations of all Indian IT companies. Uncertainty surrounding AI and the lack of adoption through automation as well as the changing dynamics of enterprise software have contributed to declining investor sentiment and a more cautious outlook for the market and the future growth of the IT industry.
As demonstrated by earnings announcements from Palantir, AI is increasingly being utilised to replace traditional software tools, especially in the enterprise environment. The implementation timelines for ERP (Enterprise Resource Planning) are being reduced, and the need for traditional software deployments is decreasing, which has historically provided the Indian IT vendors with revenue from this segment. Therefore, the challenge of remaining competitive in their industry is forcing IT companies to adapt quickly to new conditions.
As automation and AI continue to reduce the number of manual codes and testing that require human intervention, productivity on IT teams will be challenged and workforce planning will also be impacted. Based on analyst projections, it is estimated that approximately 9%-12% of the industry’s revenues will be at risk due to changing technology. The traditional revenue drivers from ERP and 3rd party software solutions are expected to continue contracting, as more clients begin using AI-based products.
Despite these challenges, Motilal Oswal notes that AI also presents growth opportunities. IT companies that strategically partner with AI platform providers can leverage new avenues in automation, analytics, and enterprise intelligence. Effective AI adoption is expected to be a key differentiator for long-term growth in the sector.
Macquaire says AI Impact Concerns Are Overstated
The Macquarie suggests that fears regarding the threat presented to the Indian IT service providers by AI technology are overstated. It believes that while AI is developing rapidly, Indian IT service providers have built their businesses around long-standing relationships with big businesses and intricate systems that AI will not be able to replicate on a large scale in the short to medium term.
The Analyst highlights the fact that the majority of the Indian IT service providers are aimed primarily at servicing large enterprise customers that do business in many countries and have very complex SAP and ERP environments.
The major Indian IT service providers remain very exposed to ERP systems (Enterprise Resource Planning) such as SAP and Oracle. Even though there is a rapidly increasing use of AI technology, there is still going to be considerable demand from large enterprise customers for consulting, implementing, and maintaining their ERP systems.
As there is no longer a reporting requirement for most Indian IT service providers regarding their ERP systems, investors will not know the exact level of exposure they are sponsoring; however, it will also not likely result in a reduction in revenue to those providers.
Macquarie’s analysis suggests that while AI and automation are gaining traction, the structural reliance of Indian IT firms on complex, global enterprise systems buffers them against significant near-term disruption. This underlines the resilience of large-cap IT companies despite growing market chatter around AI-driven efficiency.
Jefferies Warns AI-Driven Automation Could Disrupt IT Services Revenue
According to Jefferies, new AI technologies like Anthropic’s Cowork plug-ins and the new SAP from Palantir have the potential to threaten the sales of traditional application services provided by IT firms.
The importance of revenue from application services is reflected by the fact that the application services business contributes approximately 40% to 70% of total IT company revenue; therefore, any disruption in this area represents a significant risk to future revenues for the IT services industry.
The brokerage firm also pointed out that most of the consensus growth projections currently available in the market are likely underestimating the potential for AI to disrupt application services.
Jefferies cautions that traditional revenue models may underestimate AI’s impact on IT services, potentially pressuring valuations. They recommend selective investing in Indian IT firms that can adapt to AI disruption while serving large, complex clients.
They point to HCLTech, Infosys, Coforge, and Sagility as companies that have the greatest opportunity to adapt to these changing technologies while providing risk management in addition to growth opportunities.
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