UBS Warns AI Could Reshape IT Services Model

UBS, in its latest report on the IT sector, said that the recent sharp drop in Nifty IT stocks—down 13% over the past two weeks—was caused by investor concerns about the long-term growth of the industry. The selloff followed news related to Anthropic and Palantir, and investors are worried that rapid advances in Agentic AI could weaken the traditional IT services model. This model has largely relied on increasing staff numbers to grow revenue.

According to UBS, current stock valuations indicate that investors are now expecting free cash flow (FCF) growth of 4-6%, compared with 6-7% just a month ago. The valuations also suggest FCF yields of around 6%, similar to peaks seen during past downturns like the cloud slowdown and the Covid-19 pandemic. This shows that investors are becoming more sceptical about the sustainability of the old linear, headcount-driven growth model.

UBS said the IT industry needs to change its business model to remain strong. The most important change is to separate revenue growth from headcount growth. In other words, companies need to grow revenue without simply hiring more staff.

The brokerage added that management across the sector is already seeing this trend. Revenue growth is increasingly coming from automation, delivery model changes, and fixed-price or outcome-based work rather than simply increasing the workforce. This shift to a more efficient, non-linear model is seen as essential for the long-term success of IT companies in the age of advanced AI.

In short, UBS suggests that IT companies must evolve structurally, focusing on smarter ways to deliver services rather than just adding more employees, to sustain growth in the coming years.