The Indian IT services industry, comprised of top companies such as Tata Consultancy Services (TCS), Infosys, and HCL Technologies, is facing a slowdown that can no longer be attributed solely to macroeconomic factors. According to Nirav Sheth, CEO of Institutional Equities at Emkay Global, two significant structural shifts are responsible for this decline: the rise of Global Capability Centers (GCCs) and the rapid adoption of Artificial Intelligence (AI).
GCCs, which are in-house IT facilities established by global companies, are increasingly competing with Indian IT vendors for high-value projects, such as research and development, digital transformation, and AI-driven initiatives. As a result, GCC revenues grew by nearly 40% in 2024, while Indian IT services revenues experienced a sharp slowdown. This trend is expected to continue, with approximately 65% of enterprises shifting at least 10% of their vendor work to GCCs.
The adoption of AI is also disrupting the IT industry, with generative AI demonstrating 10-50% productivity improvements in coding and potentially leading to commoditized pricing and revenue stagnation for IT vendors. Sheth believes that AI’s non-linear nature, which can suddenly render entire workflows obsolete, makes it a significant threat to the industry. He predicts that AI disruption could lead to a sudden 20% drop in prices for sectors or companies being disrupted.
Sheth’s analysis of the top three IT firms’ financial performance reveals a significant decline in growth rates. Pre-pandemic, these companies experienced around 10% constant currency revenue growth, while post-pandemic, growth increased to 10.5%. However, in the current fiscal year, growth has stalled, with constant currency revenues rising only 3-4% and operating profit growing in mid-single digits. Sheth argues that attributing this slowdown to macro uncertainty is misleading and that GCC insourcing and AI-driven disruption are the primary causes.
In conclusion, the Indian IT services industry is facing significant challenges due to the rise of GCCs and the adoption of AI. As these trends continue to evolve, it is essential for investors to be aware of the potential risks and opportunities in the industry. Sheth recommends reading “Engines that move the market: Technology Investing from Railroads to the Internet and beyond” to gain a deeper understanding of technology investing and the potential impact of AI on the industry.