Artificial intelligence is changing the way software is built, sold and delivered, but CLSA does not see a broad-based “SaaSpocalypse” playing out across the technology sector. It its recent India Technology report, the brokerage said software-as-a-service companies are showing stronger earnings trends and better guidance, while IT services companies are having to deal with automation-led pressure on coding work.
Within the IT services space, CLSA sees different strengths in Persistent Systems and LTM, . Persistent Systems gets a ‘High-Conviction Outperform’ rating, while LTM carries an ‘Outperform’ rating. CLSA’s target prices are Rs 6,246 for Persistent Systems and Rs 5,534 for LTM.
CLSA’s assessment puts Persistent Systems at the top of its midcap IT services universe for overall artificial intelligence capabilities. The brokerage ranks the company strongly across generic and generative artificial intelligence, data and analytics, SaaS and middleware platforms and automation.
The brokerage’s broader thesis is that artificial intelligence is already improving productivity for SaaS companies, while IT services companies are seeing the impact more gradually. That creates a different opportunity for system integrators, which need to capture new work while dealing with lower demand for some traditional coding activities.
“AI is a big efficiency tool leading to a sharp increase in RPE for most SaaS companies, which is not the case for services companies. In our GenAI Access Days, we hosted Capillary, Amagi Labs and Unicommerce, all of which have reoriented headcount from software development and R&D functions to sales and marketing,” CLSA said.
CLSA also pointed to Persistent Systems’ ability to participate across the data, software and artificial intelligence stack. The brokerage said its SaaS and middleware capabilities give it exposure to the software platforms that are increasingly incorporating artificial intelligence into their products.
The brokerage has retained its ‘High-Conviction Outperform’ rating on Persistent Systems with a target price of Rs 6,246.
CLSA’s case for LTM is linked to the wider opportunity for IT services companies to participate in SaaS adoption. The brokerage said this opportunity remains relatively small for system integrators but could become more meaningful as software companies expand their use of external implementation and engineering partners.
CLSA also points to LTM’s position in the high-tech vertical, where coding automation has already contributed to pricing pressure. The company has sought to offset that pressure through stronger deal volumes.
“We believe the Services-as-Software (SaS) opportunity for IT services is still very small and will take time to ramp up. Globant is the only SI globally that discloses this, with c.2.5% of its revenue coming from the SaS opportunity currently, and it expects this to constitute 5% of its revenues by the end of the fiscal year,” CLSA explained.
The brokerage also sees LTM’s ServiceNow capabilities as an important part of its SaaS positioning. Its assessment places LTM among the large-cap IT services companies with meaningful exposure to the platform.
CLSA has retained its ‘Outperform’ rating on LTM with a target price of Rs 5,534.
CLSA said the high-tech vertical has experienced significant deflation because of automation in coding. Both Persistent Systems and LTM have flagged this pressure, according to the brokerage.
Rather than treating automation only as a threat, CLSA said the companies have been trying to compensate through stronger deal activity and volumes.
“In the hi-tech vertical, many companies including LTM and Persistent Systems have flagged significant deflation in the past due to automation in coding. Both companies have tried to offset that by an increase in deal volume reflected in recent strong growth in the vertical for LTM and a recent US$650m deal win announced by Persistent Systems,” CLSA noted.
For Persistent Systems, the brokerage specifically pointed to the company’s recent $650 million deal win. For LTM, CLSA cited strong recent growth in its high-tech vertical.
The difference is therefore not simply about which company has more exposure to artificial intelligence. CLSA’s assessment looks at how each company is positioned to capture work created by the wider adoption of software platforms, while dealing with productivity gains that can reduce traditional coding requirements.
CLSA’s sector view is based partly on what it is seeing in the financial performance of SaaS companies. The brokerage said the majority of SaaS companies in its coverage have increased guidance and delivered more stable earnings growth, while most IT services companies have cut guidance.
The report tracks a group of SaaS companies across Systems of Record, Systems of Engagement and Systems of Workflows.
CLSA’s table shows that several SaaS companies have either raised or maintained their revenue outlook, with the earnings-per-share picture also showing several beats. The brokerage uses this to argue that the financial performance of SaaS companies has so far been more resilient than the disruption narrative around artificial intelligence might suggest.
CLSA divides SaaS businesses into Systems of Record, Systems of Engagement and Systems of Workflows. The brokerage said the type of software being provided is important when assessing how directly artificial intelligence could affect the business.
Systems of Record serve as an authoritative source of structured data. Systems of Engagement deal with interaction and communication, while Systems of Workflows handle the orchestration of tasks and processes.
“Based on the function of each of these SaaS types, we note that it is difficult for AI to replace SoR because AI is probabilistic in nature (its output can change every time the same question is asked) while SoR require deterministic output. While AI cannot directly replace SoR, it can instead be used to enhance the capabilities of the SoR platforms by layering an additional interface on top of them. However, SoE and SoW are at a greater risk of getting disrupted since AI can directly substitute their output,” CLSA said.
For IT services companies, this distinction creates different opportunities. Software platforms that retain a central role in storing and managing data can continue to require implementation and integration work, while other applications may face more direct substitution from artificial intelligence.
CLSA’s assessment therefore links the opportunity for system integrators to their ability to work around these platforms rather than simply rely on traditional coding work.
CLSA’s report places Persistent Systems and LTM within the same broader transition, but points to different strengths. Persistent Systems has a broader artificial intelligence capability profile across data and analytics, generative artificial intelligence, SaaS and middleware platforms and automation.
LTM’s positioning is more closely linked to its SaaS capabilities and ServiceNow exposure, with deal activity helping it address pressure from coding automation.
The brokerage’s wider sector view is that SaaS companies are benefiting from artificial intelligence-led productivity gains, while IT services companies need to adapt as the nature of software development changes.