In the wake of a dramatic shift in investor sentiment from 'AI helps these companies' to 'AI replaces these companies,' CLSA has highlighted the resilience of IT sector earnings estimates and management guidance, despite the AI-led selloff. The brokerage argues that IT companies with strong SaaS partnerships are poised to benefit from ongoing demand for product engineering and implementation services.
CLSA distinguishes between different software categories, noting that Systems of Record (SoR) are less vulnerable to AI disruption due to their need for deterministic outputs. In contrast, Systems of Engagement (SoE) and Systems of Work (SoW) face greater disruption risks as AI can more directly replicate their outputs. The brokerage emphasizes that most SaaS players have maintained or increased revenue and margin guidance, indicating no negative AI impact yet.
Salesforce's first-quarter FY27 results underscore accelerating AI adoption, with system integrators benefiting from increased implementation and integration demand. During the quarter, Salesforce processed 2.8 trillion tokens, more than doubling sequentially, while agentic work units rose 111% QoQ to 3.8 billion. The brokerage notes that Salesforce's workforce expansion has primarily been in sales, with engineering headcount remaining stable due to AI-driven productivity gains.
“Trading is very much 'get me out' style selling.”
Jeffrey Favuzza, Jefferies
CLSA also highlights the importance of platform expertise and partnerships, noting that SaaS practices contribute 10-25% of revenues for most system integrators. It believes SAP project delays at HCL Tech and Wipro are client-specific rather than indicative of broader platform weakness. Among midcap IT firms, Hexaware is noted for its strong Guidewire capabilities, while Birlasoft and Persistent excel in Snowflake-related expertise.
Arbind Maheswari of BofA Securities suggests that while AI presents significant challenges, Indian IT services companies have the resilience and adaptability to evolve. Domestic brokerage Nuvama Institutional Equities also argues against the bearish narrative, asserting that the sector is poised for a comeback rather than a structural decline.
“There are people who believe that Indian IT services' whole business model is put to question by the AI trade.”
Arbind Maheswari, BofA Securities
Background
The IT sector has been grappling with the implications of AI advancements, which have raised concerns about potential disruptions. However, historical resilience and adaptability have been hallmarks of the industry, as seen in previous technological shifts.
As the IT sector navigates the AI landscape, the focus will be on how companies adapt to technological advancements and leverage their partnerships to maintain growth. Investors will be keenly watching for signs of resilience and adaptation in the face of AI-driven changes.
