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.
“AI will be another tool to address more work with the same budget, like offshore labour, enterprise software, and cloud have been in the past,” 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 “extreme bullish outliers in AI” in a note earlier in the month, citing its late-2022 comment that AI technology would “evolve at the speed of light” 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 ‘hold’ from ‘buy’ and LTIMindtree, Tata Consultancy Services and Hexaware to ‘underperform,' from 'hold'.
The brokerage expects the sector’s 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 “steady”. 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.
“Over 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,” Kotak analysts said.
HSBC swung in the opposite direction, maintaining that “software will eat AI”, since foundation models are "inherently flawed" and unsuitable for a "lift-and-replacement" of enterprise platforms.
“We 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,” 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.
“AI will be another tool to address more work with the same budget, like offshore labour, enterprise software, and cloud have been in the past,” 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 “extreme bullish outliers in AI” in a note earlier in the month, citing its late-2022 comment that AI technology would “evolve at the speed of light” 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 ‘hold’ from ‘buy’ and LTIMindtree, Tata Consultancy Services and Hexaware to ‘underperform,' from 'hold'.
The brokerage expects the sector’s 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 “steady”. 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.
“Over 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,” Kotak analysts said.
HSBC swung in the opposite direction, maintaining that “software will eat AI”, since foundation models are "inherently flawed" and unsuitable for a "lift-and-replacement" of enterprise platforms.
“We 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,” 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.