As AI shockwaves hit software firms, what’s in store for India’s IT titans?

This report is excerpted from CNBC’s ‘Inside India’ newsletter this week, which brings you up-to-date, informative news and market commentary on the emerging powerhouse. Subscriber Here.

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Indian IT stocks are facing their steepest monthly decline since the 2008 global financial crisis; The Nifty IT Index is on track to fall 20% this month as concerns over AI-induced disruptions weigh on software stocks globally.

Major tech companies at mega AI summit in India last week announced Tie-ups will be established with leading Indian IT services firms to promote the adoption of AI across organizations. Tata Consultancy Services, India’s largest and second largest IT services company in the world, ties up with OpenAI, while Infosys partner With ChatGPT maker’s rival Anthropic.

These links have hardly cheered the markets, with the Nifty IT index down 19.6% so far this month as investors’ concerns about the impact of rapid AI advancements on the sector dampened sentiment.

However, Indian IT industry leaders described the application of artificial intelligence as a “huge opportunity”.

“We are confident that AI will power growth in our business and unlock the next phase of opportunity for the broader IT ecosystem,” Sham Arora, chief technology officer at Tech Mahindra, told CNBC.

But unlike the US, where the debate is still raging between fears that AI is “irrational” and the possible collapse of companies offering software as a service, or SaaS, experts told me that AI will not make Indian firms offering IT services irrelevant. But it will narrow their margins.

Biswajit Maity, senior principal analyst at Gartner, told me that traditional IT services companies such as TCS, Infosys, Wipro and Accenture will play a “pivotal role in enterprise AI adoption” by leveraging customer relationships and domain expertise in integrating AI solutions.

Nvidia CEO Jensen Huang on Thursday also sought to downplay AI concerns, suggesting markets miscalculated the threat to software companies.

However, Maity said Indian IT services companies need to invest in talent and dedicated platforms, develop industry-specific AI solutions and innovate with customers to stay relevant. Maity and other experts predict that while some of this work is ongoing, the efforts are unlikely to protect margins for Indian IT companies.

Indian IT companies are collectively checking one third of global IT services brand valueexport technology services estimated They generate more than $220 billion annually and dominate the global outsourcing landscape, making them critical to the world’s digital infrastructure.

However, Maity said the business models of Indian IT companies depend on labor arbitrage and with the advancement of artificial intelligence, this will soon be replaced by technology arbitrage.

Indian IT companies generate most of their revenue not from SaaS but from helping businesses with integration of IT services and digital transformation. This makes AI an immediate business opportunity, but a long-term challenge.

Manishi Raychaudhuri, CEO of Asia-Pacific-focused financial advisory firm Emmer Capital Partners, told CNBC’s “Inside India” on Monday that businesses cannot “suddenly move away” from services provided by Infosys or TCS and directly “switch to Anthropic service.”

However, he added that customers are asking IT companies to include AI representatives in their services, which means pricing and therefore valuations of these companies will be affected.

Artificial intelligence will also transform the business mix of IT services companies.

Artificial intelligence could shrink the managed services business, which accounts for 22% to 45% of revenues of leading Indian IT companies, a report published by global brokerage Jefferies said on Sunday. This will increase cyclicality and require a change in talent and operating model, adding further risk.

Managed IT services refer to IT companies that undertake the day-to-day management of organizations’ IT needs to provide support services; Consulting, on the other hand, is a more cyclical business.

Jefferies said IT companies’ stock performance will “most likely” depend on the long-term business outlook rather than near-term earnings distribution.

According to Gartner, Indian IT firms are playing a key role in driving business adoption of AI, an area where spending is expected to rise sharply. The agency predicts AI software spending will reach $985 billion by 2030 and grow at a compound annual growth rate of 62.7% from 2025 to 2030 as businesses scale adoption.

However, Jefferies cut price targets for Indian IT companies by up to 33% and downgraded most large firms to either hold or underperform.

Investors appear to agree with Jefferies’ assessment and remain unconvinced that AI will benefit IT services companies. With two more trading sessions left, this month could be the worst for Indian IT stocks in nearly two decades.

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Payal Kanwar, director general of the Indo-French Chamber of Commerce and Industry, said India’s deepening ties with France will help improve the defense ecosystem.

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In the markets

Indian stocks were flat amid regional gains, driven by a rally in technology stocks after Nvidia CEO Jensen Huang said markets were on the rise. miscalculated the AI ​​threat to software companies.

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