IT Sector Update : Palantir, Anthropic, and its impact on IT services by Motilal Oswal Financial Services Ltd
Accelerated AI deflation remains key focus
Indian IT services stocks followed the global rout in technology/software/consulting and outsourcing stocks on 4th Feb’26. The key catalyst was the Palantir earnings call, which highlighted how the company is upending pay per seat software (workday, ServiceNow, etc.) as well as third-party software with its own AI offerings. The company also shared a few examples of clients getting rid of third-party software. In addition, Palantir also mentioned that its AI platform was powering complex SAP migration work, compressing implementation timeline from years to weeks. In addition, Anthropic's entry into automating low-level legal services work and Gartner's muted guidance also had a bearing on sentiment.
The extent and timing of AI deflation, and which service lines are most exposed
* Before Palantir's comments on ERP, we estimated 30-40% of IT services revenues at risk from AI deflation, largely focused on app development, maintenance, and testing. Assuming a 30-50% productivity hit on low level work in these areas (Exhibit 1), we believe 9-12% of IT services revenue stands to be eliminated. We expect this to happen over 3-4 years, underscoring a ~2% hit on revenue growth each year.
* If ERP migration and third-party enterprise software (10-15% of industry revenues) come under the purview of AI, the hit from AI would be higher.
* This is incrementally negative for the sector
Extent and timing of revenue accretion from AI implementation
* AI will render much of legacy software and testing redundant. Just like hyperscalers were initially a significant headwind to infra management services (IMS), and BPO got disrupted in earlier cycle (2015).
* As shown in Exhibits 2 and 3, many legacy IMS and BPO roles do not exist anymore, but cloud migration over a five-year period proved accretive for the industry.
* Notably, during the early cloud build-out phase (2016-17), hyperscaler capex expansion initially acted as a revenue headwind for Indian IT services as enterprises paused traditional outsourcing in favor of direct cloud investments. Once the capex cycle normalized, industry growth re-accelerated sharply
* AI implementation likewise requires modernizing the legacy tech stack of the enterprises, and we believe IT vendors have a role to play here.
* More importantly, AI-native firms will eventually leverage the enterprise relationships and context knowledge of IT vendors, who will turn out to be channel partners. This is a crucial monitorable over the next one year.
* Exhibit 11 shows the channel partner ecosystem of the last cycle, and Exhibit 5 shows evidence of the new ecosystem forming. Accenture is one of the key strategic partners to Palantir, for example.
How to test our hypothesis and when to reverse course
* We believe today's stock reaction again resets the negative sentiment for the sector.
* In the next 3-6 months, we will continue to monitor AI-native partnerships, which will be a key driver in the next 12-14 months. We expect that this should lead to a pick-up in AI services deals in mid-2026 in the form of short-cycle deals.
* We are seeing an acceleration in AI partnerships, and hence maintain our view on the sector for now.
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