Artificial intelligence may be disrupting India’s $280-billion IT services industry today, but the technology could ultimately create its next wave of growth rather than destroy it, according to Rohan Korde, Fund Manager at Baroda BNP Paribas Mutual Fund.
The fund house believes the recent correction in IT stocks reflects concerns over tariffs, AI-led disruption and weak near-term earnings guidance, but says the long-term opportunity lies in the industry’s transition from pilot AI projects to large-scale enterprise deployments. Korde sees emerging demand for data engineering, cybersecurity, cloud integration, specialised semiconductor infrastructure and AI-enabled hardware as potential growth drivers, even if traditional revenue streams come under pressure.
“While the existing revenue pools may get impacted, every disruption provides an opportunity as well, as has been witnessed in the past,” he said in an interview with ETMarkets.
Edited excerpts from a chat:
The government’s policy thrust is firmly behind manufacturing, yet you are more bullish on services. What is the market underestimating about the services opportunity?
While there has been a visible thrust on the manufacturing sector through various measures such as introduction of Production Linked Incentives (PLI) and promoting Make in India, it is also quite noticeable that the service sector has not been ignored. Various policies such as national Tourism Policy 2015, National Education Policy 2016, National Health Policy 2017, and initiatives like the National Mission on Pilgrimage Rejuvenation and Spiritual, Heritage Augmentation Drive (PRASAD) to name just a few, have helped drive growth in the services sector as well. Interestingly, The Gross Value Added by the Services sector has averaged 7.1%* year on year growth in the past 20 years, higher than both Industry and Agriculture average growth rate.
Which segments within services—financials, IT, healthcare, telecom, travel or digital businesses—offer the strongest earnings visibility over the next three to five years?The services sector offers multiple sectoral opportunities to invest in: Financial Services, Information Technology, Consumer Services, Power, Healthcare, Telecommunication, Oil & Gas, Telecommunication, Services, and Media & Publication. A lot of companies within these sectors have been growing at a fair clip in the past 5 years. We project good growth visibility in Financial Services (on low credit penetration and financialization of savings), Healthcare (aging demographics, expanding middle class, lifestyle diseases and wellness focus, and potential to see increase in medical value tourism), and Consumer Services (rapid digital acceleration boosting growth in e-commerce and quick commerce driving volumes across audience).
Indian IT services face uncertainty from AI-led disruption. Do you see AI as a threat to existing revenue pools or as the sector’s next growth driver?
The IT Sector has corrected by 23% over the last 1 year led by concerns around uncertainty led by tariffs and AI dominance. Even the growth guidance for FY27 remains weak, though the sector is a beneficiary of the weaker local currency. So, while the impact on stock prices has been immediate, there hasn’t been adequate clarity on how the opportunities might manifest. However, there can be potential prospects as the move from pilot AI projects to scaled enterprise deployments occur, which may be in the form of massive data engineering, new cybersecurity frameworks, or cloud integration & architectures and specialized semiconductors (GPUs, NPUs, TPUs), edge-AI devices, and data center infrastructure on the hardware side. To sum up, while the existing revenue pools may get impacted, every disruption provides an opportunity as well, as has been witnessed in the past.
Financial services represent a significant part of the listed services universe. Where do you currently see the best risk-reward—banks, NBFCs, insurers, asset managers or capital-market businesses?
Within the Financial Services space, we have a preference for Mid cap banks, NBFCs and platform companies in that order.
From a broader market perspective, do you expect returns over the next year to be driven by earnings growth, valuation expansion or sector rotation?
Generally, the markets do well when there is confidence in the earnings growth trajectory. IMF projects India’s GDP growth at ~6.4% for FY27* and identifies India as the fastest-growing major global economy, bolstered by resilient domestic consumption, robust services activity, and reduced external tariffs. This is higher than their projected growth rate of 3.9% for emerging markets and developing economies and 3.1% for the World. In this scenario, earnings growth, especially if the war scenario tapers off, can be a good growth driver for the markets. Of course, if this war extends further, or in case of additional hostilities elsewhere, corporate earnings are vulnerable to the tune of 300-500bps, in which case instead of earnings growth, sector rotation can be the driver.
Midcap valuations remain elevated despite uneven earnings delivery. Where do you still find a favorable risk-reward, and which segments appear priced for perfection?
While Midcap valuations may appear expensive in isolation, the current valuation is at a 6% discount to the past 8 year average PE multiple of the index. Similarly, even the large cap Nifty 100 index is trading at a lower valuation (by~8%) to its past 8 year average. At the same time, the small cap index is trading at a premium to its historical valuation. Hence risk reward broadly appears to be favourable in valuation terms for both mid cap and large cap segments.
Which sectors currently offer the strongest overlap between the midcap and value frameworks, and will return over the next three years be driven primarily by earnings growth, valuation rerating or successful corporate turnarounds?
To answer the latter part of the question, as mentioned earlier, earnings growth for India should be a key driver for returns. Successful corporate turnarounds are unique and company specific events, so they cannot be classified as a category driver, while valuation rerating is often derived as a function or outcome of improved earnings growth trajectory.
In the context of Indian markets, the mid cap framework is largely growth oriented, but following the Growth at Reasonable Prices (GARP) philosophy helps in identifying some themes closer to the value philosophy. We see Financial Services and IT offering good overlap between these frameworks due to stock correction, discounted valuation as compared to historical averages, overall good management quality, and healthy cash flow generation.
If you must start an SIP of Rs 10,000 as an investor with moderate risk appetite at this stage, how would it be spread out across various fund categories? Consider a long-term horizon of 10 years.
While it is difficult to be generic when individual investor risk return profile and tenure are different, and a planner with a holistic view of the client can be a better judge on these aspects, we believe a broad core portfolio from a longer term perspective would appear as spread 20% in hybrid (BAF), 20% each in the large / mid / small categories and the balance 20% in a thematic (value / services / consumption).