Wipro, an Indian IT services provider, could be facing notable disruption from generative AI with the release of OpenAI’s ChatGPT and Microsoft’s (MSFT) ChatGPT-powered Bing search engine. As the democratization of coding capabilities may threaten to reduce the need of outsourcing and IT consultants, the Indian IT services space could be in for a structural shift, dragging relative valuation of smaller firms like Wipro lower.
The Indian IT services sector has seen impressive growth over the years, largely thanks to growing tech spending and its successful adaptation in recent trends such as the digital/cloud transition. Yet, the influx of generative AI to the market could upend this, pushing Wipro, and other similar firms, to the back of the line. In terms of IT services, the potential productivity gains of generative AI for customers could translate into deflationary effects on margins, with smaller firms more susceptible to the competitive pressure. To adapt, Wipro would need to heavily reinvest in reskilling current staff and infrastructure to ensure the business can evolve with the new shift in demand.
There may, however, be winners from the AI upheaval. As with all major changes to the industry, IT consulting firms such as Accenture (ACN) with larger budgets, are likely to reap the benefits. Moreover, within the Indian IT sector, Infosys (INFY), with its superior hiring and training capabilities, is likely to gain share from Wipro, while the latter’s large deal pipeline may also come under pressure.
Wipro has been resilient over the years; its shift in focus towards cloud adoption, partnerships with the major hyper-scalers, and Holmes platform to tackle the AI addressable market, will all play key roles in the company’s potential AI-based future. Yet, regardless of this long-term potential, the immediate future looks a little uncertain. It is important to note that while generative AI might open up new revenue streams, this could still be outweighed by margin deflationary pressures. Therefore, in the near-term, Wipro could see its relative valuation discount widen vs Infosys, as macro concerns from the uphill economic battles in North America and Europe compound the structural headwinds to the industry.
At the helm of this Indian tech giant since July 2019 is CEO, Thierry Delaporte; the French executive previously served as COO at the French retailer Carrefour and has experience in driving sustainable business models, cost rationalization and transformation programs. Under his charge, Wipro has seen market share gains slow, with the need to invest in the AI skills arena gaining further urgency. Delaporte’s experience with large-scale transformations and leading teams will serve him well in his tasks ahead.
The release of generative AI-driven tools to the public has reignited the competition among tech companies to stay ahead of the curve. While the Indian IT services sector has shown it can remain resilient in times of shifting technology trends, the current wave of disruption around generative AI could lead to negative effects on the sector’s margins. For Wipro, this means the need to invest heavily in reskilling and building the right capabilities, something it hopes to achieve under the guidance of its new CEO. With the added deflationary effect of a potential macro slowdown, investors should bear this in mind as they watch the relative valuation discount between Wipro and its peers grow in the near-term.
