AI Poses Short-Term Challenges for IT, Yet Promises a Future Growth Engine, Says Baroda BNP Paribas MF.

The Indian IT services industry, valued at approximately $280 billion, is currently grappling with the disruptive forces of artificial intelligence. Rohan Korde, Fund Manager at Baroda BNP Paribas Mutual Fund, asserts that while AI may pose short-term challenges leading to stock corrections—evidenced by a 23% decline over the past year driven by tariff uncertainties and weakened earnings guidance—the long-term growth prospects remain robust. The shift from experimental AI projects to widespread enterprise deployments is anticipated to unlock new revenue streams, particularly in areas such as data engineering, cybersecurity, and cloud integration.

Korde emphasizes that despite the pressure on existing revenue pools, historical precedents in technology disruptions suggest that new avenues for growth will emerge. The Indian services sector, outpacing both industry and agriculture in Gross Value Added growth at an average of 7.1% annually over the past two decades, has shown resilience and adaptability. Key sectors within services—financials, healthcare, and consumer services—are poised for strong earnings visibility due to structural changes such as low credit penetration in financial services and demographic shifts in healthcare. These opportunities are likely to benefit from India’s projected GDP growth rate of 6.4% for FY27, making the country a leading global economy.

With respect to the financial services sector, Korde indicates a favorable risk-reward ratio particularly among mid-cap banks and non-banking financial companies (NBFCs). While overall market returns in the coming year will hinge on earnings growth, there remains a latent risk associated with geopolitical tensions that could impact corporate earnings. In this context, the valuation landscape appears favorable for both mid-cap and large-cap segments, with current trading multiples suggesting opportunities for investors to engage, despite perceptions of elevated valuations in mid-cap stocks.

Looking ahead, it is crucial to align investment strategies with the overarching theme of earnings growth. The likelihood of returns driven by corporate turnarounds remains speculative, suggesting a need for careful stock selection. Within the mid-cap framework, the intersection of growth and value—particularly in sectors like financial services and IT—offers attractive entry points. Investors are advised to consider a diversified approach, potentially allocating funds across various categories while maintaining a balance geared towards long-term growth in a dynamic market environment.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)