India’s IT services industry is unlikely to be wiped out by artificial intelligence, but the shift to AI-led delivery could significantly alter the pecking order within the sector, with mid-tier companies emerging as potential beneficiaries and thousands of smaller firms facing a more uncertain future.
Experts and brokerages are increasingly converging on the view that not every IT services company will be able to make the transition to AI-governed operating models. Nasscom president Rajesh Nambiar had earlier this month estimated that 20-25% of players could ultimately be left behind. The distinction between winners and losers, however, is unlikely to become clear immediately as companies are still experimenting with how AI changes delivery, pricing and talent requirements.
“The 20-25% figure is entirely plausible, and the divide will become much clearer over the next two to three years,” Phil Fersht, founder and CEO of HfS Research, said.
The large IT companies have the financial capacity, enterprise relationships and technology investments to make the transition, but their scale is also accompanied by legacy contracts, large employee bases and complex delivery structures. Accenture has consulting and ecosystem reach, TCS and Infosys have deep enterprise estates, HCLTech has engineering and infrastructure strengths, while Cognizant has been rebuilding its talent and delivery model around AI, Fersht said. Wipro, meanwhile, could use AI to simplify its operating model and improve productivity as it seeks to revive growth.
The more interesting opportunity, however, could lie with the mid-tier. Companies such as Persistent Systems, Coforge, Mphasis and LTIMindtree have enough scale and enterprise relationships to invest in AI, while carrying less organisational complexity than the largest providers. Persistent’s software engineering heritage, Coforge’s industry focus and Mphasis’ cloud and application modernisation capabilities give them potentially strong starting points for AI-led delivery, Fersht said.
Brokerages are also beginning to reflect this preference. UBS recently upgraded Tech Mahindra, Coforge and Mphasis, while retaining neutral ratings on TCS, HCLTech and Wipro. CLSA, too, downgraded TCS, Infosys and Tech Mahindra while favouring Coforge and Persistent.
The sharper disruption, though, may be lower down the industry pyramid. India has more than 20,000 smaller IT services companies, many of which operate in areas such as testing, BPO, infrastructure services, product engineering and outsourced support, according to Gaurav Vasu, founder and CEO of UnearthInsight. These businesses often operate on low costs and thin margins and lack the resources to build dedicated AI capabilities.
The rapid improvement in coding and other AI tools is already challenging some of these models. A small company whose business is built almost entirely around testing or basic product-engineering support, for instance, could find its proposition weakened as AI automates more of the work.
Vasu expects only a small proportion of such companies to survive the transition. Among listed companies, he sees Persistent and Coforge as potential long-term winners, while suggesting that some of the largest IT companies could eventually become more vertically organised, as IBM has done.
The transformation will also change how IT companies are judged. Traditional indicators such as headcount, utilisation and bill rates may become less meaningful if companies can generate more revenue with fewer employees. Revenue per employee, service-line margins and the share of revenue not directly tied to headcount are likely to gain importance.
“The measures becoming more useful are changes in gross margin by service line, the share of revenue from sources not tied to headcount, and renewals under new contract terms,” Sriram Subramanya, Founder, MD & CEO of Integra Software Services said. “We should keep two issues separate. A measure becoming less useful may show that the delivery model is changing. It does not show that demand is falling. Nambiar also mentions that order books, expected signings and deal pipelines are all growing. That is the more useful sign.”