Motilal Oswal Financial Services

Sector

Sector Update

January 2025

Update | 29

| Technology

Technology

DeepSeek ranks third among top AI

model competitors in community

evaluations - Score

DeepSeek AI and Indian IT: Our view on the impact

Pivot from brute capex to cost-efficient AI platforms could benefit Indian IT



Google

1,382

OpenAI

1,365

DeepSeek

1,357

Xai

1,288

DeepSeek, a Chinese AI startup, has developed the R1 model, which rivals

leading AI reasoning models such as OpenAI's O1. Using a Mixture-of-Experts

(MoE) architecture, R1 activates only 37 billion of its 671 billion parameters

during processing, significantly reducing computational costs and energy

consumption while maintaining top-tier performance. Remarkably, DeepSeek

achieved this with a development cost of around USD6m (although this is being

debated), defying industry norms, which take about 10x the price to achieve

similar results. Further, by making R1 fully open-source, DeepSeek has not only

increased access to cutting-edge AI but also intensified global competition,

pushing U.S. companies to rethink their strategies and investments.

While most

stock prices for most chip makers have reacted negatively as this implies much

lower compute than earlier anticipated, we believe this could shift focus from

capex to cost efficient AI platforms, possibly benefitting Indian IT.

01 AI

1,287

GenAI and Cloud: How does Indian IT make the most of this?



Services spending generally seems to follow the big-tech capex cycle (just like

during the cloud adoption phase), and we could see something similar with AI.

Back then, IaaS was merely a starting point, with hyperscalers differentiating

themselves through PaaS and SaaS offerings.

Similarly, LLM may lose its edge as the primary moat. Just as PaaS and SaaS,

built around basic compute infrastructure, became the true kingmakers,

interfaces built around LLMs are likely to become kingmakers.

Indian IT can play a significant role in this evolution by driving platform

engineering and outsourced engineering capabilities, enabling enterprises to

design, build, and scale these interfaces effectively. This could position Indian IT

as a key player in the low-cost GenAI wave.

Services, not LLM, to be the kingmaker



We have argued in our thematic report (Technology:

Bounce-back! Charting the

path to revival for IT services

– page 16) that spending in high-tech may resume

in earnest once major hyperscalers shift their focus from capex investments to

building platforms and interfaces (exhibits 4 & 5).

DeepSeek may accelerate this

trend, as it is becoming increasingly clear that LLM superiority is short-lived—

whether it is ChatGPT, Gemini, or DeepSeek, the quality of output is converging.

As a result, attention and spending are likely to pivot toward the services and

platforms built around these LLMs rather than the models themselves.

This

shift presents a significant opportunity for Indian IT to drive platform

engineering, integration, and outsourced AI services, positioning it as a key

enabler in the evolving AI ecosystem.

Abhishek Pathak - Research analyst

(Abhishek.Pathak@MotilalOswal.com)

Research analyst: Keval Bhagat

(Keval.Bhagat@MotilalOswal.com) |

Tushar Dhonde

(Tushar.Dhonde@MotilalOswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Sector Update | Technology

Auto ER&D: Lessons from the Chinese (and Tesla's) invasion of EVs



Indian IT and outsourced engineering often take a backseat during capex

cycles but become integral to the value chain once the focus shifts from

innovation to cost optimization.

A clear example of this was the capex and R&D squeeze faced by auto OEMs

during 2020-2023 (exhibit 3). As EVs and SDVs became the industry's focal point,

led by Tesla and Chinese players like BYD, European automakers faced intense

pressure to innovate despite constrained R&D budgets.

This necessity to drive

technological advancements while managing costs led to a surge in outsourced

ER&D, positioning Indian IT as a key enabler in the evolving automotive

landscape.

A similar dynamic is unfolding in AI, where DeepSeek’s innovation has

demonstrated that cutting-edge AI can be developed at a fraction of the cost.

the AI ecosystem prioritizes efficiency over brute-force compute, enterprises

will need to optimize spending on platforms, software, and infrastructure.

This

shift is likely to drive a wave of outsourced services spending, with Indian IT

playing a central role in enabling cost-efficient AI development and deployment.

What does this development mean for data centers?



As AI applications move closer to end-users through smartphones, IoT devices,

and edge data centers, we expect this to drive even greater demand for data

centers.

With India generating 28% of the global data but holding only a 1%

share of global data centers, the need for more localized infrastructure is clear.

The shift toward distributed and edge computing will require more localized

infrastructure to support the increasing volume of data. Thus, we do not foresee

any major risks to the overall growth of data center expansion due to

DeepSeek's advancements.

Colocation data centers,

in particular, should feel less of an impact than

hyperscale data centers. The nature of colocation services, where providers

lease racks and manage their own hardware, means that these facilities can

remain more flexible and adaptable to changing demands, such as AI-driven

data workloads, without needing massive shifts in infrastructure.

In the long term, we believe DeepSeek’s developments will be a net positive

for the industry

as demand for new hardware and additional space is expected

to increase.

View on stocks



We believe it is too early to ascertain the impact on individual stocks, as GenAI

currently remains a small proportion of the overall deal TCV. We will keep

monitoring this story further.

29 January 2025

Sector Update | Technology

Exhibit 1:

DeepSeek ranks third among top AI model competitors in community evaluations

Score

Google

1,382

1,365

1,357

1,288

1,287

OpenAI

DeepSeek

Xai

01 AI

Source: Chatbot Arena, MOFSL

Exhibit 2:

US tech giants' AI infrastructure expenses increased to USD223.7b in CY24, with 23% YoY growth expected in CY25

300

225

159

150

CY17

CY18

CY19

CY20

CY21

CY22

CY23

CY24

CY25E

130

147

Amazon

Google

Microsoft

Oracle

META

224

274

Source: Bloomberg, MOFSL

Exhibit 3:

Outsourced ER&D companies’ revenues skyrocketed despite depressed capex and R&D budgets as urgency to

innovate in the face of Chinese EV companies forced companies to outsource more and more

KPIT*

TATA ELXSI*

30.8%

23.9%

17.7%

11.7%

5.5%

3.1%

CY21

-14.2%

Source: Company, MOFSL, *Organic YoY cc Growth; Major OEMs include Renault, GM, Ferrari, Ford, Mercedes Benz, BMW and Honda

CY22

CY23

12.4%

12.6%

Major OEMs R&D + CAPEX YoY Growth

33.8%

27.2%

CY20

-6.3%

29 January 2025

Sector Update | Technology

Exhibit 4:

Revenues for Indian IT services vendors remained subdued during the past hyperscaler capex cycle as well; once the

capex cycle subsides and focus shifts to services spends, Indian IT should benefit, in our view

75.0%

50.0%

25.0%

0.0%

-25.0%

CY14

CY15

CY16

CY17

CY21

CY22

CY23

CY24

Source: Company, MOFSL; Hyperscalers include Amazon, Google, Microsoft, Oracle and Meta

Hyperscalers' capex YoY Growth

Avg. Tier-1 organic YoY cc Growth

Exhibit 5:

Tier 2 companies have fared better in the GenAI capex cycle as compared to earlier

75.0%

Hyperscalers' capex YoY Growth

Avg. Tier-2 organic YoY cc Growth

50.0%

25.0%

0.0%

-25.0%

CY14

CY15

CY16

CY17

CY21

CY22

CY23

CY24

Source: Company, MOFSL; Hyperscalers include Amazon, Google, Microsoft, Oracle and Meta

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

29 January 2025

Sector Update | Technology

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

< - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following

30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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29 January 2025

Sector Update | Technology

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29 January 2025