CLSA: Generative AI to Fuel Growth for Indian IT Firms, Not Hinder Them

CLSA Senior Research Analyst Sumeet Jain stated at the CITIC CLSA India Forum 2025 that Generative AI (GenAI) presents a significant structural opportunity for the Indian IT sector, rather than a disruptive threat. He argued that the market is underestimating this potential and also a cyclical upturn driven by the United States.

Jain explained that the complexity of GenAI solutions means clients cannot build them independently. This necessitates the involvement of IT service companies as system integrators to deploy these advanced technologies effectively. Experts from Nvidia and Salesforce have also highlighted this crucial role.

The traditional model focused on increasing headcount is evolving. Jain pointed out a trend of rising revenue per employee over the past three years, which is expected to continue. This improvement is attributed to firms reskilling their workforce and integrating proprietary AI agents, alongside tools like Microsoft Co-Pilot and Google Gemini. While job growth might be constrained, higher revenue and profitability are anticipated.

The United States, which accounts for 60-80% of Indian IT revenue, is showing encouraging economic signals. Jain cited the upcoming US mid-term election year and Bloomberg's forecast of 13% S&P 500 earnings growth for next year, surpassing the 10-year average. This dual perspective – structural and cyclical – paints a positive outlook.

Early signs of recovery were observed in the recent quarter, with year-on-year growth expected to improve within one to two quarters. CLSA forecasts a sector growth of 5-7% for FY27, an improvement from FY26, although not yet reaching previous double-digit rates.

Profit margins are expected to remain stable, as investments are primarily in workforce reskilling rather than capital-intensive projects. Factors like rupee depreciation, pricing power, and increased revenue per employee will help offset costs.

Indian IT firms are encouraged to use cash for capability-led Mergers & Acquisitions (M&A), similar to more aggressive global peers like Accenture. Tata Consultancy Services' planned $5-7 billion investment in data centers was cited as an example of scaling up for the GenAI opportunity.

Impact:

This news is highly positive for the Indian IT sector. It suggests that major technological shifts like Generative AI will drive growth and profitability, rather than cause job losses or revenue decline. This could lead to increased investor confidence and potentially higher valuations for IT stocks.

Impact Rating: 8/10

Difficult Terms Explained:

• Generative AI (GenAI): A type of artificial intelligence that can create new content, such as text, images, music, or code, based on patterns learned from existing data.
• System Integrators: Companies that specialize in combining different computer systems, software applications, or subsystems into a larger, cohesive system.
• Proprietary AI Agents: Specialized AI programs that are developed and owned by a specific company, designed to perform particular tasks autonomously or semi-autonomously.
• Microsoft Co-Pilot: An AI-powered assistant integrated into Microsoft 365 applications (like Word, Excel, PowerPoint) to help users create content, analyze data, and automate tasks.
• Google Gemini: A family of large language models developed by Google, designed to understand and process various types of information, including text, images, audio, and video.
• S&P 500: An index that tracks the stock performance of 500 of the largest companies listed on stock exchanges in the United States. It's a widely used benchmark for the U.S. stock market.
• Fiscal Year (FY): A 12-month period that companies and governments use for accounting and financial reporting purposes. It does not necessarily align with the calendar year (January-December). FY26 refers to the fiscal year ending in 2026.
• Mergers & Acquisitions (M&A): The consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidation, tender offers, purchase of assets, and management acquisitions.
• Data Centers: Facilities that house computing infrastructure, including servers, storage systems, and networking equipment, often used for large-scale data processing and storage.