How TCS, Infosys see opportunity in multiple planet-scale transitions

The expectation that large businesses around the world would sustain the rate of investment in tech and tech services that was triggered by the Covid pandemic came undone last year. Heading into 2023, India’s top IT companies all cut back on their hiring, reported greater uncertainty ahead and forecast slower growth.

The traditional outsourcing model no longer moves the needle for them, and pretty much all the growth is coming from services around a combination of digital technologies and cloud computing. And now, AI is in the mix. This is all happening as the world navigates multiple planet-scale transitions, says N Chandrasekaran, chairman of Tata Sons, who is also chairman of TCS.

“The global (macroeconomic) environment is going through considerable changes. At the same time, the world is navigating several important transitions: The energy transition, the supply chain transition and the AI transition,” Chandraseskaran writes in his letter to investors in the company’s latest annual report.

“Undoubtedly, these transitions will require significant investments in technology and innovation, and offer a huge growth opportunity for the IT industry,” he adds.

One such transition is the global energy transition, with businesses—especially in the advanced economies—facing mounting public pressure to become more sustainable. This shift necessitates investments in technology and innovation in areas such as electric mobility, renewable power, hydrogen, and sustainable fuel.

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Further, compliance and reporting requirements for sustainability are evolving rapidly, which, in turn, needs IT and digital technology investments, he says.

The geopolitical situation has also led to supply chain transitions, prompting companies to rebalance their supply chains for resilience and efficiency. India has become much important for multinational companies as a manufacturing and supply-chain hub as they seek to reduce their dependence on China.

In all of this, the sudden rise of generative AI has added a new dimension to businesses’ AI strategies that until recently were built around predictive analytics. While businesses are still adopting predictive AI and harnessing the power of cloud and IoT (internet of things, with large scale deployment of connected sensors), the focus is shifting towards generative AI, Chandrasekaran says.

AI and machine learning advancements are expected to have a profound impact, and using generative AI will require further technology innovation and investments, he says.

“The awesome possibilities of generative AI, we know from our own journey to becoming an AI-first enterprise, is not without its risks,” Nilekani says. “The problems of AI hallucination, systemic biases, lack of explainability along with plenty of practical, ethical and intellectual-property-related issues remain open and up for debate.”

Further, the path to scaling AI enterprise-wide is “non-linear”, he says. Successful pilot projects won’t necessarily translate to enterprise-wide value from AI, he says.

Some of this has happened before with cloud computing. In a survey last year, the multinational accounting firm and consultancy KPMG polled CIOs on their cloud projects and found that a majority of the respondents didn’t see serious value from the shift to cloud computing owing to a variety of factors—including higher-than-anticipated costs.

In AI, as demands increase, data volumes grow, and complexity rises, companies will find themselves unable to surmount the associated challenges and start to question the path to value, Nilekani says. This is a large opportunity for Infosys, according to him.

With Infosys Topaz, the company can help its customers find that “value-at-scale”, he says.

In the short term, over the next 12-18 months, the IT companies will continue to face pressure on their margins, and ability to hire the best people where experienced recruits are needed, even as their largest customers prioritise budgets to sharply focus on the here and now and defer longer-term tech-enabled plans.

“Weaker macro conditions will likely cause customers to approach discretionary IT spending with more caution,” analysts at Standard & Poor wrote in a recent report. “Projects that can deliver quantifiable outcomes will be the priority.”

These could include cost-efficiency projects and vendor consolidation projects. Non-critical projects may be delayed or canceled, and migration to cloud will remain on customers' agenda because it is a crucial part of digitalisation, they say.

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That said, the Indian IT companies will “shake off the down cycle”, according to the analysts.

“We are positive. Large repeat business from essential IT services and high contract renewal rates bolster the operational stability of top India IT companies even in more challenging times,” the analysts write.

Long-term partnerships and good service delivery also mean customers face high costs to switch providers. The IT companies rated by S&P’s Ratings Direct unit also maintain diverse revenue sources across a range of customers, sectors and specific services, they point out.

This does not mean, however, that the growth of these companies in the next 18 months is immune to global economic shocks, they say. “We expect revenue growth to slow over the next two years: From roughly 12-18 percent in fiscal 2023 (ending March 2023) to about 5 percent through fiscal 2025.”

This aligns with S&P’s GDP forecasts for the US and Europe—two of the biggest markets for India’s top IT companies. S&P forecasts the US to slow to 0.7 percent in 2023 and 1.2 percent in 2024, compared with 2.1 percent in 2022. The analysts expect Europe to slow to 0.3 percent in 2023 and 1.0 percent in 2024, from 3.5 percent in 2022.