The Mumbai-based company is worth noting that spending on general AI-related projects is complementing the outsourcing budget, which should alleviate investors’ concerns about whether new technologies lead to the Fortune 500 cutting technology spending.
“We share the productivity gains with our customers based on the kind of program,” TCS CEO K. Krithivasan said in an interview Friday. “So, yes, net income is reduced. (But) customers see savings and delivering more (quantity) of work. So TCS is still in a very strong position.”
“Using artificial intelligence, we are willing to eat. Sometimes it is an advantage,” Krisivasan said.
The current model of local IT services companies involves deploying a team of engineers to engage in mundane and commoditized work. Under the billing model, more engineers are converted into more money.
The rise of the AI generation means that intelligent algorithms fill in data about internal processes of the company and can perform repetitive work. Using more Gen AI tools can help customers save costs and generate less revenue for companies like TCS.
According to Krithivasan, this dilemma about whether to give up certain businesses is not a question.
“AI creates the need to create more software. So while the cost of writing a unit of code may drop, (the overall work) will increase. That’s our assumption,” said Krithivasan, who took over as boss in June 2023.
Genai’s impact on business
“So far, we haven’t heard from customers that this is an AI savings, I’m just going to withdraw too much. The spending comes not only from CIOs (CIOs), but also from CMOs and other CXOS internal companies inside the company. It’s all new money. So, in the enterprise, at the Enterprise level, we think (Genai) will have a bigger impact on KrithaiN. The next 12-24 months.
The country’s $283 billion IT services industry faces two challenges. First is the structural risks brought about by the rise of Genai adoption. In addition, macroeconomic uncertainty is mainly due to the risk of a global economic slowdown caused by the U.S. government’s trigger rate of tariffs.
That would be bad news.
Last week, TCS reported its fourth-quarter and full-year revenues, which was plagued by macroeconomic uncertainty. Management said they have seen some companies in the automotive and retail sectors delay starting new technology projects.
TCS reported a 3.8% revenue increase, ending $30.18 billion in revenue. Profitability fell 30 basis points to 24.3%.
TCS and its smaller peers (such as Infosys Ltd and HCL Technologies Ltd) are not quantified with AGE Gen II (including revenue or orders). By comparison, Accenture PLC, after the September-August fiscal year, received reservations for the AI generation, worth $1.4 billion or 6.7% of the order book in February 2024. In the same quarter, Accenture earned $600 million in revenue from Gen AI projects. Since September 2023, Accenture first started sharing metrics on Genai, the company won $5.6 billion in orders in Genai.
Technical damage
Therefore, some analysts question how India’s huge five giants will win in this technological disruption.
“Inherently, new technologies tend to be deflationary, a headwind for incumbents and an opportunity for challenges. Additionally, the difference in technology expertise (skill + scale) narrows down in new technologies aiding challenges. It will be difficult for TCS to aggressively incorporate gen AI into its services portfolio, given the larger size relative to challenges who can better afford to cannibalize existing revenue to get a bigger portion of the pie from incumbents,” Kawaljeet Saluja, Sathishkumar S. and Vamshi Krishna wrote in an April 11 note.
“According to management, TCS is experiencing the attractiveness of incremental rates in the Genai deal. Additionally, on the supply side, TC said AI has not hurt or replaced traditional employee growth, and the increased hiring ratio is an opportunity for AI-LED.”
“I believe the uncertainty will be short-lived,” Krithivasan said, reiterating that he hopes TCS will grow faster now than last year.
Key Points
- TCS CEO K. Krithivasan acknowledged that sharing Genai’s productivity gains with customers could reduce existing revenue streams, but took this willingness to “cannibalize” as a strategic advantage, believing that customers will reinvest their savings into more work.
- TCS asserts that customers spend on Genai projects are Add to Regarding their existing IT outsourcing budget, the objection to concerns about Genai adoption only leads to cuts in overall technology spending.
- The company builds on the assumption that, while Genai may reduce the cost of personal tasks, will ultimately stimulate demand More Software and technical solutions that increase the amount of work available.
- Despite the complexity, TCS expects Genai to eventually increase its business rather than reduce it over the next 12-24 months, citing new spending from various business units within the client company.
- TCS faces macroeconomic headwinds and different analyst opinions. While TCS is optimistic, some analysts question whether large incumbents can actively adopt Genai without disrupting its core business.
