Gen AI won’t come to IT sector’s rescue, not yet | Mint

Gen AI won’t come to IT sector’s rescue, not yet

Revenue growth for Indian IT services companies is expected to remain muted in the December quarter. (Photo: Mint)
Revenue growth for Indian IT services companies is expected to remain muted in the December quarter. (Photo: Mint)

Summary

  • Generative AI hasn't yet translated to large deals and projects for India's IT services companies and is unlikely to shore up the sector's growth anytime soon

NEW DELHI : Generative artificial intelligence, the biggest buzzword in enterprise technology this year, will not be a factor helping India’s $245-billion information technology services industry return to revenue growth in the ongoing quarter or the next. 

In fact, gen AI’s contribution to the overall revenue of India’s top IT services firms is expected to be less than 1% despite an increasing number of pilots and partnerships in this emerging technology, say industry experts.

This is not entirely unexpected. Generative AI is still in its infancy, and has failed to translate to large deals and projects, at least not yet. Revenue growth for IT services companies in the December quarter is expected to remain muted as clients across sectors continue to be conservative in spending on technology.

“The overall scale of AI deployments across sectors and types of technologies such as cloud and blockchain is quite strong. However, generative AI’s contribution as part of it remains small for the time being," said Apurva Prasad, vice-president of institutional research at HDFC Securities.

Adding to this were global economic concerns and weak overall demand.

“There is a slowdown within the US economy, which may extend into the next calendar year—that’s certainly of concern. The risk of recession is not gone either, and none of these scenarios are likely to change," Prasad said.

“Some sectors such as banking and financial services may see some relief since interest rates have relaxed. These will offer tactical factors that may make the market look a little more favourable for the service providers, but those are more driven by rates. The overall industry health is not looking better off."

India’s largest IT services companies are betting big on generative AI nonetheless.

Tata Consultancy Services (TCS), India’s largest IT services company by market cap, has “more than 250 opportunities in the pipeline," and had trained over 100,000 employees on gen AI, chief executive K Krithivasan said during a post-earnings call with analysts in October.

On Monday, TCS signed a deal to add Amazon Web Services’ generative AI services to its client offerings.

Infosys chief executive Salil Parekh had said in July that the company had 80 active client projects in generative AI. Ata post-earnings press briefing in October, Parekh said the company has trained more than 50,000 employees in generative AI skills, and the number was expanding “every week or every quarter."

TCS’ and Infosys’ progress on generative AI adoption came off the back of global cues—in June, Accenture chief Julie Sweet said the company had signed on $100 million worth of gen AI projects.

For India’s IT sector, it would still be a while before they reap the benefits.

“Most top companies across sectors are experimenting with deployments of generative AI in various ways, which is good news for the IT services sector. However, most of these pilot experiments are of deals sized lesser than $1 million in total contract value," said a senior industry consultant who works with multiple leading IT services firms. 

“If you take this into account for most of the top firms, generative AI’s contribution is at around 0.5% of the net new deals being signed by the service providers every quarter," the consultant said, requesting anonymity.

A senior researcher at a Mumbai-based brokerage, also requesting anonymity, said India’s top IT services firms are experimenting with generative AI use cases, which could expedite monetization. But not immediately.

“At least the second half of this fiscal will remain without any major large deals in generative AI for any of India’s IT outsourcers, which means that there will be no generative AI-driven boost to revenue growth in the ongoing or next quarters," the researcher said.

The global economic concerns and weak demand, meanwhile, are reflected in the stock prices of India’s IT companies. The share prices of TCS, Wipro and Tech Mahindra have each declined by 2% since the end of trading on 29 September. Infosys’ share price has remained flat. HCL Technologies is the only firm to have seen growth. 

Prasad attributed this to HCL’s mega deal wins, better-than-average revenue growth outlook, and a growing engineering, research and development practice.

In the September quarter, Infosys and HCL Technologies both slashed their annual revenue growth projections—while Infosys reduced its growth outlook to 1-2.5% for this fiscal year, HCL slashed its guidance to 4-5% of organic growth. Wipro, which offers quarterly guidance, signalled revenue contraction of up to 3.5% for the ongoing quarter.

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