IT sector: defeated but not yet defeated
Devalkar acknowledges that the AI disruption is unlike any technological shift the industry has faced before. While past technology waves – cloud, digital transformation, mobility – consistently delivered a windfall to Indian IT companies through existing modernization contracts, AI is a double-edged sword.
“Every time there is any technological change, such big insights provide opportunities for businesses. It accelerates the modernization of legacy systems in large companies,” Devalkar noted. The implementation gap in enterprise modernization remains significant, and that alone keeps the IT story intact in the long term.The crucial difference this time, however, is deflation. It is widely expected that AI will drive down billing rates and reduce the amount of human effort required to achieve the same results. Experts Devalkar estimates that AI could create a deflation of 3% to 5% for the sector – a significant headwind that explains why the market consensus on IT profit growth has been revised to low to mid single digits.
Are the shares cheap enough to absorb this? Partially. In terms of dividend yields and free cash flow figures, Indian IT names look reasonable after the recent correction. But Devalkar notes that Indian IT companies, when compared with global technology peers, are not yet exuding great value. The verdict: reasonably priced, not a flashy buy, but worth keeping a close eye on for investors with a longer horizon.
Where the smart money flows
Besides IT, Devalkar is constructive on two sectors that have shown real fundamental improvement in the last six months.
Cars, and especially commercial vehicles, are sending signals of early recovery. CV volumes have shown consistent improvement over the past two to three months, and the tractor segment continues to perform well. The near-term risk to watch, according to Devalkar, is commodity price inflation and whether automakers can pass this on to consumers – especially given model lifecycle constraints that limit price flexibility. Companies that manage this impact effectively will distinguish themselves from companies that do not. Banks and financial institutions represent Devalkar’s other high-persuasion areas. Credit growth is visibly recovering across all segments – a trend that was evident in the third quarter results, especially in corporate loans. Equally important, the NPA cycle appears to have bottomed out. With the RBI easing liquidity conditions over the past 12 to 18 months, the industry is now starting to reap the benefits of that policy shift. Axis MF has been building positions here and Devalkar confirms that meaningful flows have been tracked over the past three to six months.On the eternal debate between the PSU and the private bank, Devalkar offers a nuanced view. Private sector banks have been significantly reduced from their pre-COVID multiples, making them relatively more attractive on a historical comparison basis. Meanwhile, the PSU banks have really earned their revaluation through market share gains, improved turnaround times and better asset quality. Axis MF has both in its portfolio, suggesting this is not an either-or decision.
The investment and production theme remains strong – at a price
India’s infrastructure and manufacturing expansion remain a compelling long-term story. Cement, steel, cables and wires, capital goods linked to investments in the energy sector and electrification – all this has driven strong volume growth. However, Devalkar is quick to add that this optimism comes with a valuation caveat: many of the best opportunities in this space remain expensive.
That said, the electrification theme in particular has global tailwinds strong enough to ensure that Axis MF continues to have meaningful multi-fund exposure despite high valuations.
Where Devalkar hits the brakes
If there is one segment where Devalkar sounds the most cautious, it is consumption – and FMCG in particular. The earnings growth trajectory for the sector simply does not justify the multiples at which many FMCG names continue to trade. Axis MF was underweight in this area.
The adjacent new consumption patterns – modern retail and fast commerce – are not necessarily bad businesses, but valuations remain high and execution will need to be consistently strong to justify current prices. Devalkar’s approach here is selective rather than a blanket avoidance: some names in the space have earned a place in the Axis portfolios, but the bar for inclusion is high.
The low point for investors
The AI disruption that has roiled global markets is not a crisis for Indian IT, but it is a structural reset in growth expectations. Investors looking for deep, immediate value in IT may be disappointed, while investors with patience and valuation discipline may find that current levels represent a reasonable entry point over a multi-year horizon.
Besides the tech sector, the clearest fundamental tailwinds currently are in banking – where credit growth, liquidity easing and recovery from the NPA cycle are all in line – and in auto, where the CV and tractor recovery is gaining credibility. The production and capital investment themes remain structurally sound, but require valuation discipline.
Consumption, and FMCG in particular, is where the short-term risk-reward ratios look worst.
In a market where macro impacts are large, Devalkar’s framework is simple: follow the earnings delta, respect valuations and stay alert.
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