The Indian IT services stocks are in focus. The Nifty IT Index is flat after the sharp 7% slide to 3-month lows in the previous session (February 4). Several key components, including MphasiS, Oracle, and Persistent Systems, are under pressure for the second straight session. The key catalyst was Palantir’s earnings call, which highlighted how the company is upending pay-per-seat software (Workday, ServiceNow, etc.) as well as third-party software with its own AI offerings.
Motilal Oswal pointed out why this news is “ incrementally negative for the sector.” According to the domestic brokerage house, “before Palantir’s comments on ERP, we estimated 30-40% of IT services revenues at risk from AI deflation, largely focused on app development, maintenance, and testing. Assuming a 30-50% productivity hit on low-level work in these areas, we believe 9-12% of IT services revenue stands to be eliminated.
Significant revenue risk from AI deflation
Motilal Oswal estimates that 30-40% of IT services revenues are at risk from AI-driven deflation, particularly in areas like application development, maintenance, and testing. This could result in a 9-12% total elimination of IT services revenue over a three-to-four-year period, creating an approximately 2% headwind to revenue growth each year.
Disruption of ERP and third-party software
While the threat to manual coding was already known, recent developments from firms like Palantir have put ERP implementation and migration into the spotlight. AI is now capable of compressing implementation timelines from years to weeks, which is incrementally negative for the 10-15% of industry revenues tied to enterprise software.
The “Hardware to Services” transition cycle
Drawing parallels to the 2016-18 cloud build-out, Motilal Oswal noted that AI spending has been focused on hardware and infrastructure so far. The brokerage firm expects an inflection point for AI services to reach meaningful acceleration by mid-2026, similar to how industry growth re-accelerated after the initial cloud capex cycle normalised.
Emergence of new accretive service lines
Although legacy roles such as manual testing and low-level coding are being displaced, the brokerage said that there are new areas of growth. These include AI-assisted testing, prompt engineering, model integration, and the modernisation of legacy tech stacks to make them AI-ready.
Strategic importance of AI-native partnerships
A critical factor for future growth is the formation of ecosystems where IT vendors serve as channel partners for AI-native firms. The report further highlighted examples like Accenture’s strategic group with Palantir and Infosys’ collaboration with Cognition to scale “Devin,” an autonomous AI software engineer, across their internal and client ecosystems.