Wipro, Infosys, Hexaware, LTM, Persistent: 'SaaSpocalypse' not real, says CLSA

CLSA in its latest note on Indian IT sector said while artificial intelligence (AI) has necessitated a pricing model shift from seat-based to consumption-based, latest guidance and earnings per share (EPS) numbers by SaaS players continued to be robust. The latest quarterly results clearly defy the SaaSpocalypse narrative, the foreign brokerage said while adding that Indian IT companies that have strong partnerships with SaaS providers should continue to see healthy demand for product engineering- and implementation-related work.

SaaSpocalypse refers to concerns that AI could erode the value proposition of traditional SaaS products. Such concerns triggered selloff in SaaS stocks globally earlier this year.

CLSA, while highlighting guidance and the latest quarterly performance of various SaaS (Software as a Service) vendors to assess any potential negative impact from AI, said most SaaS players have either maintained or increased their revenue and margin guidance for the upcoming fiscal year and beaten consensus EPS expectations in the latest reported quarter.

This implies no negative impact of AI visible yet, CLSA said.

CLSA divided SaaS companies into three different types: Systems of Record (SoR), Systems of Engagement (SoE) and Systems of Workflows (SoW). Based on the function of each of these SaaS types, it noted that it is difficult for AI to replace SoR because AI is probabilistic in nature while SoR require deterministic outputs. SoR companies included SAP, Oracle, Snowflake, Guidewire and Salesforce.

Within the large caps, Wipro and other IT companies such as Accenture, Capgemini, Cognizant, have the highest SaaS exposure. For midcaps, CLSA said its high-conviction 'Outperform' rated
Persistent Systems ranked on top.

CLSA said for most of the SIs, the SaaS practice could be anywhere between 10 per cent and 25 per cent of their overall revenues. It said SAP project delays for HCL Technologies Ltd and Wipro may be more related to client-specific issues with no impact at the platform level.

"Hexaware has strong Guidewire capabilities while Snowflake then Birlasoft then Persistent are the best ranked within the mid-caps. For ServiceNow, LTM has the best set of capabilities in the large cap pool," it said.

In the large cap space, Infosys stands out in its SAP competency as well while for the mid caps, we note most of the players do not possess competencies on SAP, CLSA noted.

SAP is a leading enterprise software company that provides a comprehensive suite of business management solutions. SAP's software helps organisations run their core business processes, such as finance, supply chain management, human resources, procurement and customer relationship management (CRM).