TCS, Infosys: Does generative AI pose risks to the IT services industry?

Do you know ChatGPT, which is a generative artificial intelligence (AI), reached 100 million monthly active users in just 2 months, 4.5 times faster than Tiktok and 15 times faster than Instagram? This shows the popularity of generative AI tools among users in the present world. Before going ahead, one should understand that generative artificial intelligence is a subset of AI that automatically generates text, code, images and videos among others.

In the last few years, the capabilities of generative AI have improved by leaps and bounds across a wide range of applications. Brokerage Kotak Institutional Equities believes the release of ChatGPT to the public was an inflection point in its adoption. Now, several generative AI tools and use cases are emerging on a daily basis and hold promise to make a significant impact across industries.

The brokerage in a detailed research report explained that research from AI platform providers and IT companies indicates that generative AI and associated tools can provide a large boost to developer productivity.

“In our opinion, the larger impact will be in development-related activities, while the impact on collaboration-related activities will be relatively less. We estimate 25 per cent savings in time for a developer for the same set of tasks on a typical workday, which translates into a 33 per cent increase in productivity,” Kotak said in a report.

Impact

Kotak Institutional Equities believes that the impact of generative AI systems on productivity varies across services, with it being higher in development and lower in maintenance. The enterprise adoption of generative AI can open large new opportunities for services with a time lag as enterprises get comfortable with it. “The key risk for IT services is the deflationary impact arising from productivity increases driven by generative AI not being compensated by an increase in volumes in this transition period. We believe mid-tier firms are more vulnerable than large companies due to the former’s higher exposure to application development,” the brokerage said.

The future impact of AI on the economy and society has ignited fervent debates among tech industry leaders. Google CEO Sundar Pichai envisions AI wielding an impact as profound as fire or electricity, while Tesla, SpaceX and Twitter CEO Elon Musk cautions that AI could be the greatest existential threat to humanity.

“Despite the varied outlooks, all key stakeholders in AI concur that the technology still remains in the early stages. Most experts agree that even the most advanced AI systems of today, such as GPT-4, have yet to reach the heights of AGI (artificial general intelligence), which can be defined as an intelligent agent that is capable of understanding or learning any intellectual task that human beings or other animals are capable of,” Kotak said.

What TCS, Infosys said

While sharing his views on generative AI, N G Subramaniam, Chief Operating Officer and Executive Director, TCS in an earnings call said that generative AI as a technology is very interesting.

“It has the potential to live up to the expectation that every area can be technology driven. It can further accelerate the adoption of technology, including those which are at the frontier areas of innovation. We are quite excited about it,” he said.

Subramaniam further added that many quarters ago, he mentioned that AI/ML has the potential to fundamentally change the way that we deliver software to our clients. “And a significant part of what we are doing today can get automated, can get generated. Fundamentally, we are a tools-driven organisation. We had developed MasterCraft™ decades ago, which is a software that generates software. We are quite excited with the opportunity of delivering proven code, either you can call it a low code, no code, zero code, but -- or a generative AI kind of software, but the result is, a software that generates software. I think we'll build such expertise around that capability, around the toolset, and stay relevant to our clients’ expectations,” Subramaniam said.

On the other hand, Infosys Chief Executive Officer and Managing Director Salil Parekh in an analyst call said, “We are leveraging generative AI capabilities for our clients and within the company today, we have active programs and projects with clients, working with generative AI platforms to address specific areas, processes, and libraries within their business. We have trained open-source generative AI platforms on our own internal software development libraries. We anticipate generative AI to provide more opportunities for work with our clients and to enable us to improve our own productivity.”

Stocks to buy

IT Services theme looks attractive to Kotak Institutional Equities. The brokerage holds a ‘Buy’ rating on HCL Technologies, Infosys, Rategain and Tech Mahindra. On the other hand, it has a ‘Reduce’ rating on LTIMindtree and Wirpo. Kotak Institutional Equities has an ‘Add’ rating on TCS and Mphasis and a ‘Sell’ call on L&T Technology Services.

 

Of late, shares of IT majors underperform the benchmark equity indices in the domestic stock market due to the ongoing slowdown in the global economies.

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