SaaS is beating the ‘SaaSpocalypse’! CLSA explains what AI means for Indian IT stocks
SaaS companies are gaining market share over IT services in the AI era, according to global brokerage firm CLSA. While most SaaS companies have raised their guidance and delivered more stable earnings growth so far this year, the majority of Indian IT service companies have cut guidance.
CLSA reiterated its high conviction outperform rating on Persistent Systems and outperform rating on LTIMindtree, arguing that both companies are showing clearer signs of adapting to the AI-led shift. Persistent Systems has a target price of Rs 6,246, implying 10.7% upside, while LTIMindtree’s target price of Rs 5,534 indicates 21.5% upside.
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AI is boosting SaaS productivity
CLSA said artificial intelligence is acting as a major efficiency tool for SaaS companies, leading to a sharp increase in revenue per employee. The improvement has been less pronounced among IT service companies.
The brokerage said companies such as Capillary, Amagi Labs and Unicommerce have begun reallocating employees from software development and research-and-development functions toward sales and marketing.
By contrast, product engineering and implementation work around SaaS platforms remains vulnerable to automation. Indian system integrators will need to pass on productivity gains to clients while generating higher volumes, CLSA said.The difference is visible in recent guidance trends. Snowflake raised its revenue-growth guidance to 31% from 27%, while Datadog increased its revenue forecast to $4.45 billion-$4.47 billion from $4.3 billion-$4.34 billion. Snowflake’s stock was up 41% year to date, and Datadog’s had gained 56%, according to the report.
Salesforce has also infused Claude into its platform and launched Claudeforce, after which its stock saw a significant rerating.
Not every SaaS platform faces the same AI risk
CLSA divided SaaS companies into three categories: systems of record, systems of engagement and systems of workflows.
Systems of record, such as SAP, Snowflake, Guidewire and the core CRM platform of Salesforce, are less vulnerable to direct replacement because they require accurate, consistent and deterministic outputs. Artificial intelligence can instead enhance these platforms by adding an interface over the underlying data layer.
Systems of engagement and systems of workflows face greater disruption risk because AI can directly substitute some of the outputs they provide.
That distinction is important for investors. The AI opportunity is not simply a question of whether a company is a SaaS provider. Its exposure will depend on the role its platform plays, the data it controls and whether AI enhances or replaces its core functionality.
For Indian IT service companies, the much-discussed Services-as-Software opportunity is still limited and will take time to scale, CLSA said.
Globant is the only global system integrator that discloses this opportunity, with about 2.5% of its revenue currently coming from Services-as-Software. The company expects that contribution to rise to 5% of revenue by the end of the fiscal year.
The brokerage also noted that companies in the high-tech vertical, including LTIMindtree and Persistent Systems, have flagged significant deflation from coding automation in the past. Both companies have attempted to offset that pressure through higher deal volumes.
Persistent Systems recently announced a $650 million deal win with a US technology client, which helped drive strong order-book growth.
Persistent Systems: product engineering play
About half of Persistent Systems’ revenue comes from product and platform engineering, according to CLSA. The brokerage estimates that this is a roughly $105 billion market growing at a mid-teens rate.
Persistent has digital capabilities across hyperscalers and SaaS platforms, positioning it to benefit from the intersection of cloud, software platforms and AI adoption. CLSA expects the company’s revenue to grow at a high-teens rate and its earnings per share to expand at a 25% compound annual rate between fiscal 2026 and fiscal 2028.
The company’s management has set revenue targets of $2 billion by fiscal 2027 and $5 billion by fiscal 2031. CLSA said the key triggers for its investment case include industry-leading quarterly revenue growth, sustained order-book momentum and deal wins in product and platform engineering.
The brokerage wants Persistent to remain focused on these higher-value programmes rather than moving into routine managed-services work.
LTIMindtree: AI productivity and deal momentum
LTIMindtree has shown strong large-deal traction under Chief Executive Officer Venu Lambu, helping it offset weakness in some major accounts, CLSA said.
The company has been proactively incorporating AI into its delivery solutions, leading to a strong increase in revenue per employee. Lower subcontracting costs and greater offshoring could provide additional support to margins.
Recent large deals include contracts with Paramount Global worth $585 million, the Indian government at about $330 million, a retail client at $200 million and an agribusiness client at $450 million.
CLSA said further upside could come from large deal wins, margin expansion and a revival in discretionary spending, particularly in the banking, financial services and insurance and retail sectors.
The report’s order book data shows a mixed picture across India’s largest IT companies. In the latest periods covered, Persistent Systems recorded 40.2% year-on-year growth in its trailing order book, while Coforge reported 28.2%. Tech Mahindra’s net new deal wins were up 37.5% year-on-year.
TCS’s order book grew 1%, while Infosys’ deal value for contracts above $50 million rose 30.9%. HCL Technologies recorded 8.7% growth in net new deals. Wipro, however, reported a 7.2% decline in total bookings.
CLSA said cost takeout and vendor consolidation deals remain a priority for clients seeking savings amid uncertain conditions. Some deals are also being renegotiated to incorporate AI-related productivity gains, which may be supporting deal wins for Indian IT companies.
The key risk is that higher productivity may not automatically translate into stronger revenue growth. Customers could demand lower prices, insource software work or reduce outsourcing budgets. For Persistent Systems, CLSA flagged currency appreciation, lower deal wins, cost overruns and slower global cloud and SaaS adoption as risks. For LTIMindtree, risks include weaker margins, a delayed revival in discretionary projects and further insourcing by large banking clients.
Disclaimer: This article has been written by Nikhil Agarwal, who is not a SEBI-registered Research Analyst or an Investment Adviser. Nikhil Agarwal and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The EconomicTimes Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment.
