Indian IT Funds: AI Shift & Manager Advice
By Business Desk
Indian IT fund managers advise against selling despite a 24% BSE IT index fall. AI is seen as a transition, not a threat, with potential for new growth.
The Indian IT sector faces a significant transformation driven by Artificial Intelligence, with the BSE IT index experiencing an approximate 24 percent fall over the past year. Despite this downturn, four technology fund managers unanimously advise against selling Indian IT mutual funds.
These fund managers do not view AI as an existential threat to the industry but rather as a profound transition. They recall previous technology shifts that initially seemed disruptive but ultimately fostered new growth opportunities for Indian IT firms.
- Y2K
- Digital Transformation
- Cloud Computing
For instance, one major Indian IT company saw its digital revenue surge from $2 billion to $13 billion in six years during the cloud computing transition, with its overall revenue doubling. However, AI’s immediate impact differs, initially enabling clients to complete tasks with fewer personnel, leading to a collapse in growth.
Despite automation capabilities, essential human expertise remains critical in areas like testing, design, security, and auditing. The industry is actively shifting from a ‘time-and-materials’ model to ‘outcome-based’ or ‘fixed-price’ contracts, reflecting this evolving landscape.
- Outcome-based revenue now constitutes approximately 50 percent of the total.
Fund managers hold differing views on the sector’s future homogeneity. Shibani Kurian and Sumanta Khan anticipate a more diverse landscape with distinct winners and losers, highlighting the importance of precise stock selection. Conversely, Vaibhav Dusad expects the sector to largely remain homogeneous, with successful business models eventually adopted across the industry.
Diverse Fund Strategies Emerge
The four funds employ varied approaches to navigate this evolving market. Meeta Shetty’s fund maintains a ‘purist’ Indian IT position, actively managing cash allocations.
- Kurian’s fund focuses on rigorous stock selection, without utilizing cash for allocation.
- Khan’s Edelweiss Technology Fund holds a broad mandate, including US technology and AI infrastructure, and notably outperformed last year.
- Dusad’s large fund necessitates early and accurate positioning due to its substantial size.
Regarding exposure to the US market, Khan’s fund has significant holdings in US technology, while acknowledging the potential risk of an AI bubble. Dusad differentiates between the ‘Magnificent Seven’ and broader US software, finding more value in the latter segment.
Dusad also cautions on the extensive investments in AI infrastructure, questioning how providers will justify these costs given the potential for price undercutting from Chinese models. Despite these considerations, the unanimous advice from all managers remains firm: do not sell Indian IT mutual funds now.
Current valuations are at a trough, trading below pre-COVID levels, indicating a potential undervaluation in the sector.