IT Stocks Still Risky? Nilesh Shah Explains The AI Threat To Indian IT | Business News | ET Now

Añadido: 2026-05-26

[00:00:00]This is your back again on the green on the bank nifty we are holding on to 24,000 mark for the nifty that that on the spot levels I think is a sort of a crucial support for the index on the expiry date today and you know the drop in the India weeks to that 16.5 levels we could probably if we close to 16 this could be you know back to that you know times when the war started off you between you you know US and Iran so I think that could probably be a good litmus test for the index that maybe we could be nearing the end of the volatility for the indices. In terms of opening trade still sticking to the private sector banking theme ICICI Bank is something which looks attractive at the current juncture.

[00:00:38]Okay all right uh that's the take coming in from Kunal as well. Uh Kunal thank you so much for joining us. We'll obviously see you at some point later in the day. Uh let me bring on board Nilesh Shah of Envision Capital here to give us his perspective with regard to what's playing out in markets and how is he playing markets?

[00:00:56]Uh Nilesh it's a very interesting market especially the last few months. Uh have you been using the dip to to nibble on to the positions that you typically like? What have you been doing and and has anything changed for you structurally uh given everything that's played out?

[00:01:12]Absolutely it's been a wonderful time the last few weeks last few months. I think the kind of volatility that we saw the correction that we saw because of external factors have created honestly a great uh buying opportunity into your existing positions as well as some of the newer positions as well.

[00:01:28]So I think it's been a great time this is pretty much very characteristic of any bull market where you have a year which gives you maybe one or two occasions for you know those 10 20% correction and that creates an opportunity for you to uh accu- accumulate and be constructive.

[00:01:43]So that's really how the last few uh months have been and I think uh both the macro data has still has has turned out to be good. Uh the earnings have been usually supportive so to that extent I think it's been a great place to be.

[00:01:57]Uh so so what have you been buying there for Nilesh? What's the sectorial tilt that you've been looking at? IT has seen a big correction. In fact, you know, it's been a while since we spoke, but but even since that point we've seen a very decent correction in IT. Is that something you're looking at?

[00:02:14]Uh I think IT still faces headwinds.

[00:02:18]Clearly, yet there is no clarity in terms of how really the next few quarters will play out.

[00:02:24]Uh we honestly don't know if the current business models are valid or these current business models will have to be reoriented, restructured, or if I may use the word reformed to kind of make them more relevant is something which still I think we don't have an answer to. We continue to watch the space very very carefully.

[00:02:42]And let's see if over the next few quarters uh we get better insights in terms of the medium to long-term direction of Indian IT services companies. So while yes, prices have come off, valuations have turned even more reasonable than where they were, uh but we're still not very clear if there is enough ability of the sector to kind of move from say a low single-digit growth to even a high single-digit, maybe an early double digit. So IT is still a place where we have stayed away from.

[00:03:12]Uh also the fact that the currency has depreciated provides an additional tailwind to IT, but I still think the challenge for them is um is is whether they can basically grow revenues meaningfully.

[00:03:24]Um I think the space that we have been more focused on are areas around digital platforms, D2C consumer businesses, energy security, defense-oriented indigenization, um drug discovery and health care, and then discretionary consumption. These are basically the half a dozen pockets that we have been focused on and have been constructive on.

[00:03:51]Very interesting. Okay. But Nilesh, I'm going to ask you one follow-up on IT before I go to some of those pockets.

[00:03:57]With regard to IT, how do you therefore play the AI trade? You you you're obviously a very well-versed investor in tech. You you enjoy growth investing and it's and and you get it right a lot of times.

[00:04:11]How do you play AI, especially with regard to India?

[00:04:14]Thanks for that. And I I think India will still be an adopter of AI. I think we're still at the very early stage of essentially building the foundational layer. So, to that extent, we still have some time to go whether we become the Brahma and it's not necessarily it's it's basically the creators who create the maximum value. It's also the adopters who create phenomenal value.

[00:04:38]And we are seeing already basically early signs of Indian companies, corporate India beginning to basically adopt AI.

[00:04:47]Whether that adoption of AI is for operational efficiency, streamlining processes, customer service, customer experience, or helping customers to engage in personalized search.

[00:05:00]These are some of the areas that we see AI being increasingly adopted. We're also seeing some of the banks, lenders, credit, NBFCs also to start using AI in areas like collections as well. So, we basically already seeing that across a broad set of sectors, we're seeing enough players beginning to adopt AI to solve problems both external as well as internal. And that to me I think is going to lead to a companies and businesses being able to expand markets, expand customer base, get more out of a customer, and also improve internal efficiencies and productivity, all of which is likely to result into more capital efficient growth, more productivity gains, and I think that all goes very well. So, we actually believe that outside of conventional IT services, AI is actually going to be a tailwind rather than a headwind.

[00:05:58]Nilesh, hi. Morning.

[00:06:00]If that's the case, do you think that the value creation by this Indian IT services for applications and usage will offset the kind of revenue deflation that's expected from the AI?

[00:06:15]And over and above that, the sector can grow on that?

[00:06:19]Suchit, I think it's it's going to be hard to kind of yet have an answer to that. It's still very early days. I'm not even too sure whether the IT sector itself has basically a very meaningful kind of answer or a response to this emerging challenge.

[00:06:36]I think the bigger challenge for the bigger IT services companies is that for them it's going to require a huge amount of reorientation.

[00:06:42]They have a large workforce, and many of them still essentially are at the very early stage of their their career cycle. So, to that extent, one has to really see whether they will be able to offset the emerging opportunity from AI and AI implementation versus the kind of displacement or dislocation that it could lead to in terms of their existing businesses. So, that is something which we will have to see. And just to kind of think that if today the revenues are $100, and let's assume that basically AI creates another $20 of opportunity, which mean the big question that which we need to probably yet understand is that that $20, will it be good enough to offset the kind of deflation which could happen in terms of the existing business which is $100. So, we have to see whether the 100 becomes 80 or it gets even lower.

[00:07:40]That's something which we will have to see.

[00:07:44]Nilesh, what we have seen in the last three to four quarters play out is many of the IT companies losing between 40 to 50% in value.

[00:07:52]Uh mid mid-cap mid-tier companies which are trading at 20 35 times have come down to 24 25. The The top tier which is trading around 23 25 is now at 15 16.

[00:08:04]Uh is that the normalized valuation for this this kind of sector now?

[00:08:08]I still believe that the valuation is more than outcome. I think it's going to be very very important in terms of basically what's basically going to be the revenue growth outlook and what's going to be the margin profile of these companies. Ultimately, market is a slave of growth, of margins, of cash flows, and earnings.

[00:08:29]This is really where the market is going to be and you deliver more, you fetch higher valuations, you deliver less, you get less valuations. We clearly believe that multiples and valuation multiples are more than outcome rather than the kind of input itself. So, honestly, I still think at this stage, I don't think that's very important whether they can find support at a particular valuation multiple. Yes, for the short term, the space looks oversold.

[00:08:55]You might see some basically investors trying to kind of do a trade out there hoping for a bounce back. So, maybe to that extent, maybe in the short term in the near term, maybe from a price point of view, the worst could be behind. But I think it'll be very very important to know really what the commentary comes out from the IT services companies over the next maybe couple of quarters or so.

[00:09:17]I think it's only best once we hear them, see what they have to deliver, and then really be able to take that big call.

[00:09:24]Interesting, Nilesh, you spoke about the margins part of it. Many of the IT companies are holding onto the margin levels and it's much better and higher than the global peers whose margins are much lower there.

[00:09:36]Do you think, you know at some point in time the market will look at the margins even though there is a revenue deflation which is going to come in uh and see that okay there's a good EBITDA margins which has been sustained by these IT companies and they should be looked at at an EBITDA multiple point of view?

[00:09:53]Uh so Sachin I think the the the big challenge still will remain is it going to be growth outlook.

[00:09:58]Uh I think you could still enjoy better margins because basically either the currency has depreciated so you have tailwinds of a currency depreciation or you essentially don't need to increase head count or you probably don't engage into some bit of downsizing.

[00:10:13]Uh so even a 5 to 10% downsizing uh can basically contribute to the margins. So to that extent I'm not sure whether the market is currently focused on margins. I think the market is really focused on right now is basically relevance of this IT model and that basically can companies restructure themselves, re-engineer themselves to make themselves relevant. I think that's really the big question and what does all of this translate into a medium-term growth trajectory, growth in revenues is what basically is the big question or the billion-dollar question.

[00:10:49]Hm. Okay. Uh you spoke about various other sectors. Nilesh, let me quickly switch focus. We've we've completely uh dived dived very very deep into into IT but give us a sense. With regard to defense, what's the tilt like? Is it going to be more of software and the like that you're that you're looking at in terms of investments? Is it hardware? Is it both?

[00:11:12]Give us a sense.

[00:11:14]Well so right now it's likely going to be product companies, companies which are manufacturing components, which are manufacturing sub-assemblies. Maybe some of them emerging to be basically um system integrators or assemblies themselves. I think that's really where um the the continues to be. that's really where a very large part of the universe in terms of defense and aerospace companies continue to be. And that basically has a strong tailwind of indigenization from the government of India. So, there's basically the local tailwind of indigenization. And there's basically a global tailwind of the geopolitical environment. I think these two factors are confluencing at the same time, which is basically creating the growth runway for the Indian defense companies. And within that, it's clearly for now lies with the manufacturing companies.

[00:12:06]Of course, some of them have a services component as well.

[00:12:10]I don't think there is yet a full-fledged software-led or an AI-oriented defense play as yet.

[00:12:18]But we'll have to very carefully watch the space and look at it. And if there is basically a credible player which emerges with very strong software capabilities, AI capabilities on defense aerospace, then that has the potential to be a champion for the future. But right now, it's more focused on the hardware, the components, and the assembly and the manufacturing side.

[00:12:40]You believe that execution growth should likely follow? I know you can't talk stock specific, but that largely most companies will be able to deliver with regard to the kind of growth guidance they've been given because very tall guidance, especially among the private sector defense players. Of course, the PSU players also delivering extremely strong numbers. Is there a preference or tilt between those?

[00:13:06]So, well, for now, I think it's still I think one will still have to be bottom-up. I don't think it really kind of matters whether it's PSU or private.

[00:13:14]Ultimately, I think there's growth opportunity for all.

[00:13:17]All you need to kind of keep watching out is where essentially is the is the execution happening. Number one. Number two is which are the kind of companies which are broadening their product offering, diversifying their customer base, diversifying their revenue base to create a sustainable growth model. I think that's really is where the where the where the focus ought to be.

[00:13:40]Uh second is defense is a very working capital intensive business. Uh operating cash flows are hard to come by. So, I think over the medium to long term it's going to be individual players who essentially have the ability to manage uh the negative working the the working capital or the or the negative operating cash flows. I think those will be the emerging winners here.

[00:14:01]Mhm. Nilesh, uh what we've seen in the last uh couple of uh days and uh and few weeks is the rotation back to mid-cap and small-cap stocks. Earnings have been decent uh much better than the tier one stocks there. Do you see that uh you know, it's there is uh a momentum going back into mid-cap and small-cap now?

[00:14:24]I think the momentum in mid-cap and small-caps has been strong. Yes, there are those few weeks, few months where there is a bit of a risk off trade happening in the market which exerts some downward pressure on some of these mid and small-caps, but ultimately what's really happening I think is that investors continue to be focused on delivery and performance. And I still believe that mid and small-caps have delivered relatively better versus their large-cap peers. So, I still believe that the opportunities abound in the mid and small-cap space. Uh the large-caps are essentially more uh a proxy for liquidity given their earnings profile has been a lot less. So, large-caps essentially have been more uh have been moving more around where the big institutions are really kind of uh positioning themselves.

[00:15:09]Um so, I think that's that's what you're seeing. I think mid and small-caps have had a relatively better run. It but however, having said that in the very short term, uh it's quite possible that the large-caps could also have a comeback.

[00:15:22]Mhm.

[00:15:23]how do you look at the railway stocks?

[00:15:26]They've been buzzing a lot.

[00:15:28]A lot of investments now going into, you know, railway railway infrastructure. Not only infrastructure, but also, you know, the wagons and others. And a major orders also expected. And many stocks are buzzing on it. Do you see that runway for railway now again picking up?

[00:15:47]Well, absolutely. I mean, clearly I think railways is going to be a huge focus. Has been a huge focus area for the government. It will continue to be a huge focus area. I think railways basically is not just a basic infrastructure provider, but I think it's also one of the ways to for India to achieve its energy security.

[00:16:06]Given that the government's focus has been and will remain on trying to shift everybody from private transport to public transport. And within public transport, railways can play a very very important and a cardinal role towards essentially the government wanting everybody to use more and more of public transport. So, be it basically metros, be it essentially intercity expresses, the bullet train project in the long run, cargo handling, all of that will continue to be a a strong focus and that will continue to provide very strong impetus to various companies which are basically established vendors to the Indian railways.

[00:16:46]So, again, Nilesh, will it be some of the private players which will benefit just given the scale that they're looking to achieve or the guidance is that they're giving, which is impressive? Or will it be some of the mainstay PSUs where growth has been slower to come? How should one play the theme?

[00:17:05]So, we are currently owning PSU within that space and and we like that PSU because it's not I mean, of course, it's it's it's a important provider of coaches to the Indian Railways.

[00:17:18]Uh it's also working on the bullet train project, but in addition to all of that, it's also basically into mining equipment. It's also provides vehicles for defense. So, it's a kind of a more broad-based holistic uh play rather than just a dedicated uh kind of play on on on the rail opportunity. So, we currently have a railway exposure through a PSU.

[00:17:39]Nilesh, uh what we have seen in the last uh 10-15 days is the power sector coming back in focus. NBC came out with a good set of numbers. We have uh foreign funds now, you know, stocking up some of the power companies. Uh we saw yesterday JSW Energy saying again GQG coming and picking up some stake in through the QIP uh route as well. Uh do you think that uh power theme has is now coming back on the back of the the kind of demand which is expected in maybe 4 to 5 years down the line from uh data centers?

[00:18:10]Well, absolutely. I mean, clearly again, energy security, decarbonization, and energy security continues to be a very, very important pillar and a priority uh for India. And so, we clearly believe that the power sector uh across the board, I think uh offers tremendous opportunities. Be it on generation, be it on transmission, be it on distribution, be it on battery energy storage. I think there are many pockets and sub-pockets to kind of keep an eye on within the power sector. And uh what we have clearly seen is that a lot of the sector, a lot of the stocks which are essentially a play on India's energy requirements uh have been essentially the leaders in this bull market. Um and yes, there has been intermittent corrections in them, corrections in magnitude of 10-20%. But we believe that those are only basically good opportunities to participate in India's move towards both energy security and decarbonization.

[00:19:06]Nilesh, uh you know, you spoke about consumption and how you're bullish on consumption. Now, there's plenty happening in the global marketplace.

[00:19:12]You've got uh uh prices at the pump going up as well. Likely have a negative read through with regard to inflation.

[00:19:19]Despite that, you're positive with regard to consumption. What pockets and what's the thesis?

[00:19:25]So, well, what we are basically focused on is essentially more the aspirational side of consumption. Uh we believe that as as as as Indians as Indian consumer earns more, I think there is an aspiration to kind of spend better, not necessarily spend more but spend better.

[00:19:43]And that's leading to a fair bit of premiumization.

[00:19:46]Also, the way a consumer is essentially buying or consuming is changing.

[00:19:51]And you're seeing essentially some of the pockets within consumption which are growing at a very strong place. One of the most notable area has been uh beauty and personal care and personal hygiene. That's really a segment which has been witnessing some very very strong and and solid growth.

[00:20:07]So, we like that space. Clearly, I think affordable fashion is again an area where consumers are basically more more more aspirational and that's driving growth. And third, essentially, some of the consumer internet platforms despite the headwinds have been growing at a very strong pace just because they are giving more choice to consumers and delivering at their doorstep. So, I think these are some of the kind of positives which basically are going for the consumer space. Yes, with rising oil prices and with rising inflation, that does create basically a tailwind, but we still believe that India's consumer base is huge. And within that massive consumer base, I think it'll be great to see some interesting consumer product opportunities as well as consumer internet platforms as well.

[00:20:58]Thank you so much, Nilesh. This has been a long conversation. It's been a deepest conversation on various aspects of the Indian market. Thanks so much for coming in and giving us your view.

[00:21:08]Thank you so much. Thank you.

[00:21:10]Thank you. And and