Analysts are divided on AI's long-term impact on IT services firms, with some forecasting revenue deflation and earnings downgrades for core services like application management, while others believe AI will expand the market by creating new work alongside automation.
The debate centers on execution, with performance hinging on how companies manage the transition. Key uncertainties include the pace of AI integration into enterprise systems and the balance between productivity gains and new revenue streams.
Major topics covered include the divergent analyst forecasts for the sector, the specific business areas at risk from AI automation, and the critical role of IT firms in implementing and integrating AI within complex enterprise environments.
Analysts are divided in their opinion over the long-term viability of IT services firms, after Anthropic released artificial intelligence software plugins that will allow companies to automate several tasks, including in finance, research and human resources.
While some forecast revenue impact and earnings downgrades, others maintain that AI would expand the market for service providers.
âAI will be another tool to address more work with the same budget, like offshore labour, enterprise software, and cloud have been in the past,â said JP Morgan, which expects IT services to also benefit. "IT services companies remain the plumbers in the tech world," JP Morgan analysts wrote in a February note on the Indian IT sector. If AI agents rewrote enterprise software, they would still need significant services plumbing to work in an enterprise context and minimise AI slop, they said.
The American brokerage, meanwhile, positioned itself as âextreme bullish outliers in AIâ in a note earlier in the month, citing its late-2022 comment that AI technology would âevolve at the speed of lightâ and surprise investors with its capabilities.
Another US brokerage, Jefferies, predicts application-managed services, which represent 22-45% of revenue for Indian IT services companies, to face "sharp revenue deflation" as AI tools improve. Jefferies cut its ratings on at least six tech service stocks, downgrading Infosys, HCLTech and Mphasis to âholdâ from âbuyâ and LTIMindtree, Tata Consultancy Services and Hexaware to âunderperform,' from 'hold'.
The brokerage expects the sectorâs earnings to grow 6% on a compound annual rate (CAGR) through fiscal 2028, which is 3-14% below market estimates.
Analysts also have an either-or scenario, pinning the burden of performance on how service providers execute their strategies.
According to Motilal Oswal, 12-15% of sector revenue faces direct exposure to AI-driven productivity/displacement risk, resulting in a 10% cut to earnings-per-share estimates in a scenario where deflation materialises over 12-18 months.
However, analysts noted that with 90% of OpenAI token usage currently concentrated in new-age firms (startups), large enterprises still have their managed services projects intact, making it difficult to deploy AI at scale, which requires integration with legacy stacks, data clean-up, and governance alignment.
Kotak Institutional Equities termed the current demand environment as âsteadyâ. A gradual improvement in demand should aid in moderate acceleration, despite anticipating a higher deflationary impact as AI models move from proof of concept to production, it said.
âOver the medium term, we continue to expect IT service providers to remain relevant, though the growth will depend on the extent of productivity pass-through and timing of new revenue streams coming up,â Kotak analysts said.
HSBC swung in the opposite direction, maintaining that âsoftware will eat AIâ, since foundation models are "inherently flawed" and unsuitable for a "lift-and-replacement" of enterprise platforms.
âWe see the legacy enterprise software vendors as among the key beneficiaries and diffusion paths for unlocking the value-creation potential of AI within the production of the $100+ trillion global GDP ecosystem,â analysts at HSBC said, highlighting that the software vertical is positioned in front of a massive expansion in TAM (total addressable market) over the next 5-10 years.
While some forecast revenue impact and earnings downgrades, others maintain that AI would expand the market for service providers.
âAI will be another tool to address more work with the same budget, like offshore labour, enterprise software, and cloud have been in the past,â said JP Morgan, which expects IT services to also benefit. "IT services companies remain the plumbers in the tech world," JP Morgan analysts wrote in a February note on the Indian IT sector. If AI agents rewrote enterprise software, they would still need significant services plumbing to work in an enterprise context and minimise AI slop, they said.
The American brokerage, meanwhile, positioned itself as âextreme bullish outliers in AIâ in a note earlier in the month, citing its late-2022 comment that AI technology would âevolve at the speed of lightâ and surprise investors with its capabilities.
Another US brokerage, Jefferies, predicts application-managed services, which represent 22-45% of revenue for Indian IT services companies, to face "sharp revenue deflation" as AI tools improve. Jefferies cut its ratings on at least six tech service stocks, downgrading Infosys, HCLTech and Mphasis to âholdâ from âbuyâ and LTIMindtree, Tata Consultancy Services and Hexaware to âunderperform,' from 'hold'.
The brokerage expects the sectorâs earnings to grow 6% on a compound annual rate (CAGR) through fiscal 2028, which is 3-14% below market estimates.
Analysts also have an either-or scenario, pinning the burden of performance on how service providers execute their strategies.
According to Motilal Oswal, 12-15% of sector revenue faces direct exposure to AI-driven productivity/displacement risk, resulting in a 10% cut to earnings-per-share estimates in a scenario where deflation materialises over 12-18 months.
However, analysts noted that with 90% of OpenAI token usage currently concentrated in new-age firms (startups), large enterprises still have their managed services projects intact, making it difficult to deploy AI at scale, which requires integration with legacy stacks, data clean-up, and governance alignment.
Kotak Institutional Equities termed the current demand environment as âsteadyâ. A gradual improvement in demand should aid in moderate acceleration, despite anticipating a higher deflationary impact as AI models move from proof of concept to production, it said.
âOver the medium term, we continue to expect IT service providers to remain relevant, though the growth will depend on the extent of productivity pass-through and timing of new revenue streams coming up,â Kotak analysts said.
HSBC swung in the opposite direction, maintaining that âsoftware will eat AIâ, since foundation models are "inherently flawed" and unsuitable for a "lift-and-replacement" of enterprise platforms.
âWe see the legacy enterprise software vendors as among the key beneficiaries and diffusion paths for unlocking the value-creation potential of AI within the production of the $100+ trillion global GDP ecosystem,â analysts at HSBC said, highlighting that the software vertical is positioned in front of a massive expansion in TAM (total addressable market) over the next 5-10 years.
Meridiano
