IT companies in reset mode amid slow growth in AI times – The Times of India

BENGALURU: Indian IT firms generated around $20 billion in free cash flows last year, and more than 75% was returned to shareholders. Industry experts believe Indian IT firms are in for a big reset, especially with AI disrupting the linear relationship between revenue and employment.
The Indian IT sector is reeling under a single-digit growth cycle. Its mainstay financial services business is under pressure, and lower discretionary spending provides a limited runway for growth. Besides, Indian developers are bracing for challenges from AI advancements, particularly as basic & intermediate-level coding tasks become increasingly automated.
The top five Indian IT firms had free cash flows of nearly $13 billion in the 2023-24 financial year. In a recent LinkedIn post, Ramkumar Ramamoorthy, who serves as a partner at Catalincs, a technology growth advisory firm, raised an intriguing question: Can Indian IT deploy a part of its free cash flow as “risk capital”? Can it help prevent “techolonization”?
“A commonly heard argument is that the IT services sector, given its asset-light model, does not require significant investment. When growth is suboptimal, the priority is often to return cash to shareholders. While this reasoning holds, the landscape is changing. With hundreds of billions of dollars locked into opportunities created by multiple structural shifts in technology and business, isn’t now an opportune moment for companies to capitalize on these shifts by reinvesting in the business and leaping into the future instead of playing by yesterday’s rules?” Ramamoorthy wrote.

Namratha Dharshan, chief business leader at ISG, said the industry is at an inflection point.” Many of the IT majors recognise that the traditional business models amidst a fast-changing technology landscape will not be sufficient to address the needs that will arise in the future. IT services companies must strike a delicate balance between fostering innovation and meeting shareholder expectations for predictable returns.”
Phil Fersht, CEO of HfS Research, said smart Indian IT firms must focus more on reinvesting their cash into broadening their global capabilities, especially considering the recent changes with the US administration and the current state of global trade and geopolitics. “If they just focus on pleasing their shareholders’ short-term needs, they will struggle long-term if they expect the same old traditional business to keep growing at 10% a year.”
Fersht said there is an increasing concern from US industry leaders that all their exports of work outside the US will come under the spotlight as new tariff programmes get rolled out. “The impact would result in big hikes in costs, which could be as high as the 25% level, considering the current tariffs that are being set. Why stop at Mexico, Canada, China, and the EU?”
Ramamoorthy pointed out potential avenues to explore strategic investments leveraging cash flows for growth. “There are abundant opportunities for the industry and for well-run companies with predictable cash flows. Could they use their substantial cash flows as “risk capital” (akin to what Alibaba or Tencent did) to take minority stakes in promising next-gen companies that are into products, platforms, deep tech, and more? Second, could a consortium of these cash-rich companies invest in building India’s much-needed compute, AI, cloud, and cyber infrastructure and benefit from it, rather than leaving this critical task largely to the govt?”