India’s esteemed IT firms,, where US software companies often outsource their work, are confronting a stark reality check as global investors pivot towards AI-based solutions and leave behind pricier old-economy tech stocks.
Unlike their counterparts in developed nations and China, Indian software giants, including industry leader Tata Consultancy Services Ltd., are yet to make substantial strides in generative AI.
This, coupled with a murky outlook for client spending, threatens to relegate them to the status of outdated tech investments.
Deven Choksey, managing director of DRChoksey FinServ Pvt. Ltd., highlights the risks facing traditional software companies whose business models fail to adapt to evolving trends. A recent dip in the BSE Ltd. gauge of Indian software stocks indicates a technical correction. Yet, valuations remain relatively high compared to historical averages despite a prolonged rally in the nation’s equity market.
For years, India’s IT firms thrived on robust growth fueled by significant corporations outsourcing back-office operations to cut costs, a phenomenon famously dubbed “getting Bangalored.”
However, recent years have seen a slowdown in revenues as overseas clients trim spending amid challenging economic conditions. In contrast, software and internet giants like Microsoft Corp. and Alphabet Inc. have been channeling billions into developing cloud services and large-scale language models.
Choksey showcases the need for Indian firms to swiftly revamp their business models to embrace AI and deliver enhanced software-as-a-service solutions and infrastructure akin to Amazon.com Inc.’s Amazon Web Services. However, the pace of adaptation remains a critical challenge.
Tata Consultancy Services (TCS) recently reported its slowest annual sales growth in three years, while competitor Infosys Ltd. issued a cautious revenue forecast for the fiscal year through March 2025. Although Indian IT companies and global peers like Accenture Plc have been vocal about their AI initiatives, their contributions to sales remain relatively modest.
The volatile geopolitical landscape and uncertain macroeconomic outlook further compound challenges for client spending priorities. The IT sector may face further downgrades following disappointing sales performances in the previous quarter.
Jefferies Financial Group Inc. analysts underscore the risk of earnings downgrades in the IT sector, limiting potential upside in share prices. Additionally, lofty valuations and subdued growth metrics raise caution among investors, signaling potential headwinds for India’s software makers.
In the absence of significant advancements in AI, India’s IT firms risk losing investor interest as the threat of business cannibalization looms large. The global trend of increased corporate investment in AI at the expense of non-AI spending underscores the urgent need for adaptation and innovation within the Indian tech landscape.
