When Tata Consultancy Services (TCS) announces its results on Thursday, one closely watched metric will be the revenue generated from the company’s Generative AI (GenAI) projects. This is true not just for TCS, but for the entire Indian IT services industry which, last year, exported net services worth $193 billion. Analysts say that just like companies would call out digital revenues to indicate a shift away from traditional revenue sources a few years back, GenAI’s contribution will be increasingly tracked closely to map the fortunes of both individual companies and the sector as a whole.

“We see a bearishness among investors for the IT services sector akin to what was last seen in 2016-17, based on their positioning. At that time, investors were concerned about the structural growth of the sector as legacy IT services demand was slowing down. At the same time, the digital offerings of Indian IT services companies were still unproven at scale. In the past, such a high level of bearishness ended with a sharp rally in the sector,” said Kumar Rakesh, Analyst – IT & Auto, BNP Paribas India, in a report.

He added that foreign institutional investor (FII) holdings in the sector have fallen to the lows last seen in December 2017. However, in the nine months following December 2017, the CNX IT Index saw a rally of more than 40 per cent, and, in the years that followed, Indian IT services companies had established themselves as key beneficiaries of digital adoption by enterprises.

According to the report, Indian IT services companies are now building strong GenAI capabilities similar to digital skills, and are undertaking mammoth retraining programs for their employees in GenAI technologies. Simultaneously, they are aggressively forming partnerships and launching platforms to build GenAI service offerings for enterprise customers.

In the fourth quarter of FY24, TCS reported its GenAI revenues was worth $900 million. The company also trained around 350,000 of its employees in AI skills. Infosys, in its recent Annual General Meeting addressing shareholders, had emphasised its rapid GenAI adoption, with over 2.5 lakh employees trained in AI. The company is currently developing over 225 GenAI programs for its clients. In 2023, Wipro committed to investing $1 billion to advance its AI capabilities over the next three years. HCLTechnologies also announced plans to train 50,000 employees in GenAI by the end of 2024.

According to reports, the three IT firms - TCS, Infosys, and Wipro, have collectively trained over 7.75 lakh employees in GenAI capability by the end of FY24.

“When digital transformation arrived, investors were skeptical whether Indian IT service providers could move the needle, but they did well despite not being aggressive initially. Covid-19 accelerated this adoption; businesses were digitizing most of their processes. Like digital was earlier an investment cycle, so is GenAI,” said Pareekh Jain, CEO at Pareekh Consulting and EIIRTrend.  

“But the question is about the arrival of this new investment cycle. Macro situations are not good; companies are reducing discretionary spending to invest in AI instead. However, going by the experience with digital, Indian service providers can advance in GenAI,” stated the analyst. Jain added that clients familiar with GenAI innovations like OpenAI’s offerings, are also pushing for this adoption, which is a lot more aggressive than it was with digital. 

A key difference from 2017’s digital transformation journey is the concerns surrounding job displacement. Employees fear that if GenAI picks up, jobs will require fewer people for the same work. There is hope that GenAI investment will come, but also a fear of cannibalization of jobs and revenue, which was not the case earlier with digital. 

“Globally, software providers like Google, Amazon, and SAP are laying off people. Typically, this happens when the company is not faring well. However, this is happening despite good performance. There is no significant recruitment despite future growth.  Investors are worried about whether GenAI will reduce or increase revenue. There will be a general investment cycle, but it will be double-edged,” he said.