Not AI, Indian IT services face this real risk: Prashant Paroda

The prevailing weak sentiment around Indian IT stocks is an overreaction to fears of artificial intelligence (AI), while the real risk for the sector is its muted revenue growth, said Prashant Paroda, Portfolio Manager–Emerging Markets at Allspring Global Investment.”I think it’s a little bit overdone, because people are projecting that AI will sort of take over tomorrow, which you know it’s probably not going to happen. So from the IT services perspective, the growth still is very muted,” he said adding that “The risk, I think, for this sector, is still in terms of top line growth, and till we see any clarity on that, the AI news will come and go, and  stocks will react to that.”

He pointed out that investors who stayed away from the IT sector and preferred areas such as telecom over the past three years would likely have generated better returns.
The recent market moves are also being influenced by hedge fund positioning, with many investors long on semiconductors and short on software stocks, he said.Hedge funds have already made over $24 billion by betting against software stocks and are now looking to increase those short positions, according to a report.

The selloff in Indian IT stocks continued for a second straight day on February 5 as global concerns around artificial intelligence-linked disruption and weak cues from US technology shares kept investors cautious.

The weakness followed a sharp overnight move on Wall Street on February 4, where software stocks tumbled after Anthropic introduced a new artificial intelligence tool focused on legal work, triggering a broad reassessment of demand for traditional software and services.

The selloff wiped out roughly $300 billion in market value across global software names. While software shares later stabilised, chipmaker Advanced Micro Devices fell 17% after issuing weaker-than-expected guidance, adding to volatility across the technology space.Also Read: Budget’s data centre move to drive jobs, AI growth: Ashwini Vaishnaw

Dharmesh Kant of Chola Securities believes a deeper lack of product-led innovation is also one of the worries weighing on the IT services sector. He said Indian firms remain largely focused on back-end services while global players are building platforms that can reshape markets.

“The problem with Indian IT space is we are always left catching up… We have a history of more than 30 years in the IT servicing part, and still we end up managing the back end of the system,” Kant said, adding that growth could remain muted unless Indian companies create disruptive products of their own.

Kant expect IT services growth to remain around 4-5%, which may drop further to 1-2% after currency adjustment.

However, Paroda also pointed out some key positives for Indian IT stocks. “The good thing for Indian IT services versus, like a lot of SaaS (software-as-a-service) plays in the US, is that they don’t come at very high valuations. They actually pay out dividends.”

Also Read: Tech sell-off sparks AI worries over Indian IT services: Arvind Sanger, Moshe Katri debate outlook

For the entire interview, watch the accompanying video

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