Reinventing rules of business key to Indian IT companies' valuation

Experts say Indian IT services must boost R&D, acquisitions, and AI-led innovation to avoid being seen as legacy providers

The message on the wall is clear.  Indian information-technology (IT) companies need to adopt a new playbook if they want to have their Nvidia or Oracle moment -- an eye-popping surge in stock prices that catapults companies into another league from where there is no looking back.

 

Oracle’s resurgence shows what can happen when a company commits capital to re-invent itself around a technology shift.

 

“Indian IT firms could learn that shareholder value comes from sustained innovation and market leadership, not just preserving margins. Do not behave like a bank handing out dividends, but behave like a tech company shaping the future,” Phil Fersht, founder and CEO of HfS Research, told Business Standard.

 

The criticism of Indian IT services companies has been increasing as artificial intelligence (AI) rewrites the rules of business. Analysts and industry experts have highlighted the need to invest more capital in research & development (R&D) and build more AI-native applications to reposition themselves as the go-to players in the technology services arena as the ground below them undergoes a seismic shift due to the impact of AI, Gen AI, and agentic AI.

 

Experts say the moment is on these companies, both large-cap and mid-tier, with piles of cash at their disposal to plough it back to build more AI-driven solutions and applications or grow inorganically with targeted acquisitions -- something that has been the hallmark of sector leader Accenture.

 

“Accenture wrote the playbook here with its relentless reinvestment in R&D, continuous capability building, and being willing to disrupt its own delivery model. It has built deep industry relevance and IP (intellectual property) instead of leaning on buybacks,” added Fersht.

 

Accenture spent $1.2 billion on R&D for its financial year ended August 2024, according to the company’s Annual Report. This investment supported areas such as AI, digital transformation, and the development of new technologies and services for clients across various industries. It acquired 10 companies this year, focusing on AI, education, and workforce training as it attempts to reskill and train its army of nearly 800,000 in new-age capabilities.

 

Additionally, during 2019-24 the average number of acquisitions per year was 33.2, according to the data from Tracxn. In FY24 (YTD) it acquired 35 companies at $5.2 billion.

 

The acquisitions have helped the company take the lead in Gen AI revenue, galloping ahead of Indian services providers. For the first nine months of its financial year ended June, Accenture’s Gen AI bookings were $4.1 billion and revenue of $1.8 billion. In contrast, Infosys, Wipro and other companies are yet to disclose those numbers.

 

Only TCS reported AI and Gen AI bookings to have doubled at $1.5 billion in the first quarter of FY25.

 

“The AI playbook of large or mid-size Indian IT services isn’t still clear. We believe these firms have only two options -- either build AI services as an offer or AI/Gen AI applications which can be a bolt-on into a system of records like SAP, Oracle, Guidewire or Microsoft,” said Gaurav Vasu, founder, UnearthInsight. He added Indian peers should have a dedicated AI leadership, acquisitions and AI teams to build many more AI applications rather than just focusing on AI as a service.

 

That is perhaps also weighing in on the share prices. Besides the macroeconomic uncertainty and the impact of tariffs, investors continue to view these well-run companies as legacy service providers rather than taking the lead in AI and surging ahead. The BSE Information Technology Index is down 19 per cent in the last one year.

 

That could also explain the reason why Infosys’s shares inched up just one per cent on Friday, even though India’s second biggest IT services provider announced its largest ever Rs 18,000 crore buyback a day earlier.

 

“Expecting Infosys or any other IT service firm to behave aggressively like Accenture which has a history of acquisitions and rapidly reshaping its business, is not right. Indian providers are generally risk averse and focus on manageable tweaks to their models rather than a fundamental transformation,” Yugal Joshi, partner at Everest Group, said.

 

But Fersht thinks otherwise and says the market is signalling scepticism. “Share prices suggest investors see them as dependable cash machines, but not as frontrunners in the AI race. Clients and markets want to see if these firms can move beyond selling people-hours to embedding AI into outcomes. Until they prove that, they’ll be priced as legacy players, not innovation leaders.”

 

While buybacks and dividends have been the known policies of these companies to reward shareholders when growth is slow, they now need to think beyond that. “With hundreds of billions of dollars locked into opportunities created by multiple structural shifts in technology and business, isn’t now an opportune moment for companies to capitalise on these shifts by reinvesting in the business and leaping into the future instead of playing by yesterday’s rules,” Ramakumar Ramamoorthy, founder of Catalincs, wrote in a LinkedIn post earlier this year.