GenAI productivity gains threaten up to 15% IT revenues: Motilal Oswal

Generative artificial intelligence (GenAI) can put more than a tenth of current IT revenues under pressure as companies increasingly put the technology to use, brokerage firm Motilal Oswal said in a report.

Tech companies are employing GenAI across the process of application development and maintenance (ADM), especially in coding, testing, and debugging, according to the report. With 35-45% of IT revenues tied to ADM, even partial automation could pose significant troubles for the industry.

GenAI could automate 40-45% of ADM work hours, which could put 10-13% of overall IT services’ value at risk, Motilal Oswal analysts wrote. “We estimated that up to 10-15% of current revenues could come under pressure as clients start getting more for less, making productivity a structural challenge.”

AI conversations

In their latest post-results interactions, top Indian IT firms pointed out that AI solutions are fast becoming a popular talking point in client conversations.

“We are seeing enterprises move beyond small-scale, use-case-centric pilots to disciplined, production-grade rollouts that tie GenAI directly to business outcomes,” said Aarthi Subramanian, group chief digital officer at Tata Consultancy Services (TCS).

Motilal Oswal analysts have a different take on the scenario. As the Indian IT sector’s legacy business undergoes deflation, there is an absence of new technology to replace it, unlike earlier transitions.

“This time, GenAI is exacerbating the deflationary pain, but there is no budgetary expansion from a new tech cycle in sight. Clients are experimenting, but large-scale rollouts are limited, and traditional programs continue to get rationalised or delayed. As a result, the deflation in legacy services is not being offset,” the report said.

More companies acknowledged after their April-June quarter results that GenAI-led productivity is leading to commercial pressure, it pointed out.

Q1 IT margins reflect pain

Operational income margins, which reflect efficiency, took a beating in the three months to June, with “GenAI-led productivity gains hitting near-term revenue and pricing harder than initially anticipated,” Motilal Oswal pointed out.

“Margins are being impacted from multiple fronts, like pricing, client behaviour, and a GenAI transition. But it could be the beginning of a painful realignment, as vendors will need to search for different pricing and delivery models to cope,” the brokerage firm said.