Indian IT services companies are facing significant structural pressure as generative artificial intelligence (AI) rapidly transforms software development and the economics of traditional technology services, according to a September 15 report by Nirmal Bang Institutional Equities.
Generative AI Shifts Value Away from IT Services
The report highlights that the economic gains from generative AI are increasingly benefiting AI model companies rather than traditional IT services providers. As AI improves developer productivity, tasks that previously required extensive billable engineering hours can now be completed with fewer human hours, despite rising computing and token consumption costs.
Nirmal Bang cited the explosive growth of AI model providers, such as OpenAI's 130% year-on-year quarterly revenue growth to US$6.7 billion and Anthropic's 1,300% year-on-year revenue increase to US$11.5 billion, as evidence of this shift in value.
Reduced Growth Guidance and Flat Headcount
Large-cap IT services firms, excluding Tech Mahindra, recorded an average sequential constant-currency growth of zero percent, aligning with earlier concerns raised by the brokerage. Several major companies have also lowered their growth guidance:
- Accenture reduced its guidance to 3-4% from 3-5%.
- EPAM revised its constant-currency growth outlook to 2-3% from 2.5-5%.
- Infosys narrowed its guidance to 1.5-3% from 1.5-3.5%.
These cuts, Nirmal Bang suggests, reflect growing compression and competitive pressures within traditional IT services, making it challenging for companies to sustain both revenue growth and high margins. Employee additions at large-cap IT companies remained largely flat, with total headcount rising only 0.1% on average, indicating relatively low exposure to AI-led service delivery.
Mid-Cap IT Firms Show Resilience
In contrast, mid-cap IT services companies performed better than their large-cap counterparts, largely meeting Nirmal Bang's expectations. Their smaller market share means they have less legacy business to defend, and some have successfully secured deals previously beyond their reach by leveraging AI-led delivery models.
Outlook and Price Targets
Nirmal Bang estimates developer throughput could rise 5-8 times, while clients might integrate around 20% pricing compression into technology budgets. This could redirect a significant portion of the economic value historically captured by IT services companies towards compute and AI model providers. The brokerage anticipates this pressure will become more evident across the sector as AI-led productivity gains increasingly impact traditional services revenue.
The firm expects large-cap IT companies to face greater pressure in FY27 due to their larger legacy revenue bases and higher exposure to potential wallet-share leakage. Mid-cap firms like Coforge and Persistent Systems are seen as having relatively lower risk due to their smaller scale, greater agility, and less exposure to renewal-led compression affecting larger players.
Nirmal Bang maintained an 'underweight' stance on the IT services sector, viewing the long-term opportunity in a leaner, AI-native services model, but cautioned that the transition for traditional players would likely be painful.
Revised Price Targets:
- Sell Ratings:
- TCS: Target Price Rs 1,724
- Infosys: Target Price Rs 1,984
- Wipro: Target Price Rs 151
- HCL Tech: Target Price Rs 949
- Tech Mahindra: Target Price Rs 1,187
- LTM: Target Price Rs 3,235
- Hold Ratings:
- Coforge: Target Price Rs 1,971
- Persistent Systems: Target Price Rs 5,734
- Mphasis: Target Price Rs 2,375