That India's IT services industry wants to send out, which is loud and clear, that it's alive and kicking and ready to take on the AI challenge. Joining me now at the HCL Tech Pavilion is the man steering the company. CVK, it's always good to have you here with us. And let me start by asking you exactly that, CVK. February has been a difficult month for the IT services sector, 2.6 lakh crore rupees in market cap erosion since the 6th of February. What is the message that you want to send out to the markets? Is the SAS apocalypse real?
Shereen, thank you for visiting us here in the AI summit. It's fantastic. If you recollect two years ago, we did call out as a company that AI is a big disruption moment and we want to embrace it proactively, right? So, none of this surprises us. We looked at how the technology would evolve and really started building a strategy which will future-proof our business. It's about proactively transforming our services as well as building intellectual property which bridges the gap between all the LLMs and reasoning models to how it can be applied in the enterprise world. So, the technology is moving very fast. You've seen it, but the enterprise adoption is gradual and it is rightfully so. Actually, if I want to use an analogy, God created the world in seven days because there was no installed base. Right? There was nothing installed. You don't need to worry about compatibility issues. You don't have to worry about data migration and integrations, all of that, right? And there's no bugs to fix. So, it's very easy, but in a real world, in a real enterprise, there are so many complex installed systems.
It's not as easy as plug and play. It's not, absolutely it's not. And that's where service providers like us, we have a lot of trust with a lot of big enterprises and we have the context of the enterprise. So, along with the large language models and all the reasoning and all of that and using our IPs, which are all focused on capturing the enterprise knowledge and building a delivery model which will really scale as impressively as how the models and the technology is scaling. That's what we are doing.
No, and you're right that you called this out two years ago and we've spoken about this and your pivot towards a more AI-driven future. But CVK, let's build out the scenarios now and I want to understand from you. We spoke about this in Davos. Let's start by talking about margins. What should we realistically expect in terms of margins as the model changes, as billing becomes more outcome-based, as revenue becomes more outcome-based? What should we expect then for margins in the medium to long term?
Of course, the drive is to move towards more outcome-based models and typically an outcome-based engagement can deliver a much higher margin because it really helps you to leverage all the technology levers and optimization levers and it helps you to improve margins.
You're saying margins can actually improve as opposed to the fear of compression?
Of course, it should improve because there is a big opportunity to convert as much as possible to outcomes and when you do an outcome-based model, there is a little higher risk, but there is higher reward as well. So, if we can play that equation well, I think there is a potential for the margins to improve.
So, how much of the business is now moving towards this outcome-based model as you speak?
Today, we have more than 50% of our business is already in some kind of outcome model. But eventually, it's going to move to ultimate business-outcome-based models. So, I think we will move 3 to 4% we want to move. We want to move a lot of our large engagements into more outcome-based models and that also gives us a lot of flexibility in the talent deployment, where we deploy, what technology we use. And that kind of takes on a lot of responsibility, and that's how we will get rewarded as well.
The other question then CVK is being asked, what happens to growth in the medium to long term? Are we talking about sustained low single-digit growth? Are we talking about slightly better, or are we talking about no growth at all? For the industry.
First of all, I mean, we've been the fastest-growing company for probably the fourth year in the running. So, there is going to be depletion in the existing business, especially a lot of application development kind of business. And we do have a meaningful chunk of applications business. While a lot of our business is in engineering services or software or infrastructure services, we do have some components which can have a much higher depletion potential. So, we believe there will be 2 to 3% depletion at an overall level because of AI. And this is something we've modeled. But there are at least five mega opportunities that we are chasing, right? AI factory, it's a trillion-dollar capex will mean at least a hundred million dollars, hundred billion dollars of services spend, and at least a couple of billion dollars we should be able to get from that. Physical AI is again another big opportunity. The whole agentic implementation, see, there is a huge legacy installed base. Modernization of this is again a big opportunity. And for modernization, you just need to be in the enterprise, you just need to understand each enterprise's uniqueness. And we are very well placed to adapt to that. And so, that's why we've called out advanced AI revenue, which is really focusing on the newer revenue streams. While our existing business will continue to grow because there is still a big market, right? IT services is a 1.5 trillion-dollar market. I mean, we are 15 billion, our industry is only 200-300 billion. So, there is still if you have a very sharp proposition which can make an impact, you can gain a lot more wallet share and that's been our strategy as well.
You had given me a number as far as your advanced AI revenue is and where do you see that on the back of what you're seeing now since we last spoke, which has barely been a month, a month and a half, but there's so much that's already changed. I mean, on track to be able to deliver to that number?
Absolutely. We had called out about 600 million dollar annualized revenues advanced AI. And once again, this is different from regular AI revenue lot of companies are talking about because regular across the board we need to use AI to change everything that we are doing and that we don't call out as AI revenue. It's the IPs, it's the new solutions. That's what we are calling out and I think it's the 4% and I think it can be a very powerful growth driver. It has grown 20% quarter on quarter and we think it can get to 2.5 to 3 billion dollars, much more than offsetting some of the decline that can happen in the existing business. And existing business also there is a big market still and if you have a sharper proposition, a platform-based agentic IT services delivery model, I think there is an opportunity to gain a lot more wallet share.
