Transition time: IT services sector to see new winners and losers

The latest results and guidance statements of India’s large information-technology (IT) companies indicate trends that will redefine the IT services sector over the next two to three years. TCS, Infosys, and Wipro reported weak fourth-quarter (January-March) results, and the respective managements struck notes of abundant caution, pointing at the global uncertainties related to US tariffs. This uncertainty may lead to postponement and reduction in discretionary spending by clients. Demand for IT services may be weak in sectors like retail, logistics, and manufacturing, which are immediately impacted by disruptions in supply chains. The auto sector is critically affected, for example, and the auto supply chain is the most complex and globally distributed of all. 

American retailers — such as Best Buy, Walmart, and Target — have indicated that higher prices are affecting their sales. In travel and logistics, FedEx and some airlines have expressed caution. Indian IT services firms with higher exposure to retail and manufacturing will, therefore, be under pressure. Discretionary spending in other verticals may also be impacted by a weak demand environment. However, the penetration of generative artificial intelligence (GenAI) is rising. This creates new areas of opportunities for the Indian IT services majors, requiring among other things a reconfiguration of the business model.

  DeepSeek, with its promise of sharply reduced costs, has triggered a rise in demand for AI-induction. Investment in Hyperscalers, focused on AI, will rise 30 per cent in 2025, according to Gartner, and global expenditure on GenAI will go up 75 per cent. Indian IT firms could play key roles across many points of the AI value chain in handling data management, migration, and the finetuning of large language models (LLMs) and small language models (SLMs). The AI readiness of the Indian IT sector obviously differs from firm to firm. But the addressable market for GenAI-related products and services is growing fast as corporations look to GenAI to reduce costs, improve efficiencies, and create revenue streams.

  Spending on GenAI this year will be driven largely by the integration of AI into hardware, with 80 per cent of spending on hardware. Software spending will also rise substantially. Strong relations with clients and proven track records give Indian IT firms a foot in the door when it comes to partnering clients on the road to GenAI. Indian IT firms could win deals in the modernisation of legacy infrastructure, data management, and platform migration, coupled with the finetuning of LLMs and SLMs for specific clients. Indian IT firms are setting up partnerships and looking at mergers to penetrate the AI ecosystem.  Infosys has SLM-based offers clustered around its “Topaz” while Mphasis offers NeoCrux. And Intellect Design offers Purple Fabric. Wipro is in partnership with Amazon’s AWS for enterprise cloud migration to drive AI-related customised solutions. TCS, Infosys, HCLTech, and Tech Mahindra have all partnered Yellow.ai for AI solutions to enhance human resource management and customer service automation while Infosys has a partnership with Sarvam.ai to build SLMs for banking and IT operations.  Macro uncertainties apart, this financial year may see contractions in revenue or very slow growth across the IT industry as companies adopt new business models. There will be new winners and losers across this space over the next two years.