Indian software service companies are facing changes in their contractual work due to client demands for increased productivity from generative AI (GenAI) and global economic uncertainties. Experts warn these changes could reduce profit margins for these firms.

Infosys, Tata Consultancy Services (TCS), and HCLTech have all noted shifts in client contracts over the past two quarters, with clients expecting the same work for lower prices or expanded work scopes during contract renewals. This shift has put pressure on their profit margins.

HCLTech reported a 1.5% decline in IT services revenue in Q1 due to the end of major deals in financial services. The company's earnings before interest and tax (EBIT) margin also suffered as it transferred productivity gains to clients.

TCS CEO K. Krithivasan mentioned that clients are now adding more work scope during renewals to keep revenues stable, while Peter Bendor Samuel, CEO of Everest Group, highlighted that clients are pushing for greater productivity from GenAI, which may exceed current capabilities and pose profit risks.

Analysts from Nomura and Kotak Institutional Equities have observed similar trends, noting that productivity gains shared with clients are affecting margins. Nomura specifically pointed out a 50 basis point contraction in HCLTech's EBIT margin due to these productivity concessions.

Pareekh Jain, CEO of EIIRTrend, explained that clients' expectations have risen with the advent of GenAI, adding to traditional productivity methods like process improvement, automation, offshoring, and analytics.

Infosys also experienced contract renegotiations in the financial services sector, resulting in a slight revenue impact in Q4. Although some work was reduced, the majority of the contract remained intact.