The Indian IT sector’s rally on the back of India-US trade deal proved to be short-lived as stocks took a heavy beating on Wednesday. The Nifty IT index registered its sharpest ever fall of 2,286 points. In percentage terms, it fell 5.87% — the highest since March 23, 2020.
The sharp fall came after US-based artificial intelligence firm, Anthropic, announced that it is launching a new set of AI tools for corporate legal teams and hit IT and SaaS (software as a service) companies across the globe, including Indian system integrators. Infosys led the decline with a 7.26% dip on the National Stock Exchange (NSE), followed by Tata consultancy Services (TCS; 7.01%).
Analysts called this development a ‘SaaSpocalypse’ that wiped out Rs 1.99 lakh crore of market capitalisation from the top 10 Indian IT firms.
“The legal tool launch announcement by Anthropic brought to reality what the market was hypothesising regarding the impact of AI on SaaS and related companies,” Pareekh Jain, founder and chief executive EIIRTrend said.
“A credible AI vendor showing domain-specific automation in a high-cost, white-collar function forces investors to reprice how quickly effort-based revenue models could be compressed,” Phil Fersht, chief executive at US-based research and advisory firm HFS Research observed.
Sridhar Vembu, founder Zoho Corporation said in a post on social media platform X (formerly Twitter) that the SaaS industry was ripe for consolidation well before the AI revolution.
“An industry that spends vastly more on sales and marketing than on engineering and product development is always vulnerable. The venture capital bubble and then the stock market bubble funded a fundamentally flawed, unsustainable model for too long. AI is the pin that is popping this inflated balloon,” he wrote. Vembu added that Zoho’s ability to adapt will decide if it will survive the AI wave.
Risk of traditional delivery models
Since the emergence of AI agents, experts had flagged the risk of traditional delivery models becoming redundant. Currently, SaaS companies work on a licensing model where they develop a software, lease or sell it to clients, and bill depending on the number of users.
Indian IT companies come in to integrate this software into the clients’ networks. The current SaaS model is high margin business since the software once developed can be sold to multiple clients. Indian IT companies also have their own SaaS verticals.
The emergence of agentic AI led to the hypothesis that instead of human engineers and coders, AI agents could be used to build software which can be leased to enterprises directly. This will help them develop the software they need, cutting out the need for SaaS providers. Alternatively, these companies could build the software themselves and sell to the clients at a more competitive price, eating away at the market share of SaaS and IT companies.
“Indian IT services are still largely valued on people, effort, and utilization. When investors see AI tools performing complex professional tasks with fewer humans, the immediate assumption is that services firms lose pricing power,” Fersht added.
According to some estimates, the global tech services spend stand at around $1.5 trillion. Of this, approximately $500 billion is spent on SaaS and the remaining on services. With agentic AI tools and enterprise solutions by new age companies like Anthropic, this $1.5 trillion pie will be shared by more players.
“Anthropic’s announcement creates uncertainty around business models which are fundamental to SaaS and IT companies. While Indian IT has been tepid due to macro factors recently, this development questions, not demand environments or policy impact, but the basic business thesis they operate on,” an analyst with a leading brokerage added.
To put into context the adverse sentiment triggered by the development, in percent terms, February 4 saw the single biggest day fall of 5.87% in six years, since March 23, 2020, the start of the global pandemic. Nifty IT Index was the top sectoral loser on Wednesday, a day when benchmark Nifty were marginally up by 0.19%.
Threat to Indian IT sector
Another threat to Indian IT specifically is the development of AI agents that could replace in part the work the companies do for their clients.
“Tomorrow, there could be agents that can handle some part of the IT management and system integration services. This means the human effort to be deployed by IT companies would reduce, which will directly impact billing,” Jain added.
The urgency, experts said, is for the incumbents to fast track their own AI products. This however is easier said than done since most traditional companies have a legacy overhang. For companies like Anthropic, AI is the sole focus which makes them more agile, experts added.