The most recent set of reseach reports have more bad news for investors holding Indian IT stocks. Brokerages across the board have downgraded IT companies in target prices and recommendations. The NiftyIT index is at an all-time low. The question is, is this a temporary slump, or will the sector recover?

Race to the bottom: A fundamental shift for Indian IT

The two cuts to Infosys' FY17 revenue guidance - by the bellweather company of Indian IT - is a signal of what is coming for the industry. This downtrend is not going to be easy to reverse. Indian IT firms might see improvement in quarterly results in Q4 as the global economy starts to recover, the overall trend for the industry is negative. Analysis that points to trends like Brexit for the decline are missing the larger trends that are impacting Indian IT.  

A changing client base : In the last decade, the companies that dominate global businesses have also changed. Today, the biggest businesses - Google, Facebook and Apple - are tech companies with large B2C components, and 'service' is a core part of their offering, which discourages outsourcing. These companies would rather keep the most important parts of their IT infrastructure in-house to retain their competitive edge

The rise of bots and AI: Recent client wins in Indian IT have concentrated in sectors that are late-adopters of new IT trends - manufacturing, healthcare and retail. These too, are likely to shrink in the next five years, as these sectors move to automated, high-speed analytics and cloud services. 

The shifts in global businesses that have brought Indian IT to this low point are only going to get stronger. The heydey of Indian IT was the late 1990s - mid 2000s, a period when IT companies like Infosys and Wipro were hiring from the top engineering colleges and dominating news headlines. Indian software firms were hired to help fix “Y2K” problems in old software code, and this expanded into a wide range of services across domains, especially in sectors like Banking and Financial Services, Telecom, Infrastructure,and Manufacturing.

During this period of growth, Indian IT firms built their business mainly on process competencies and support services. Most of such work is now getting automated - Siri like bots manage customer interaction better than call centers, and automated SaaS tools are being quickly adopted by global firms. This is doing away with expensive, time-consuming software upgrades that once encouraged outsourcing and large back-offices. Cloud services are eliminating data centers, and the management they needed. 

Look to hiring trends for a sign: As a result of these shifts, the kind of work firms like Infosys, Wipro and TCS have been handling, is moving down the value chain.  For example, low-value services like maintenance and testing now account for over 35% of Infosys revenue, and 'value added' services such as application development are not growing fast enough. The type of work is reflected in the hiring changes by these companies. In the year 2003, Infosys received one million applications for 10,000 openings, and Infy, TCS and Wipro visited the IITs and NITs to make placement offers. In 2016, none of these companies focused on the top engineering colleges because of wage competition from smaller product-oriented Indian firms - they are instead hiring from Tier2 and Tier3 engineering and non-engineering colleges. The hiring shift is a warning - as AI and bots claim jobs across industry sectors, Indian IT is going to take a big hit. The downgrades are likely to be the first of many. 

Where does future growth lie for Indian IT firms? IT companies like Cylent are, unlike the rest of the industry, on the upswing and indicate that there is growth to be had in areas like product development and design. But that is a big change required for IT service behemoths who've got used to the old way of doing business.