AI may hurt IT today, but it could create the sector's next growth engine: Baroda BNP Paribas MF
Artificial intelligence may be disrupting India's $280-billion IT services industry today, but the technology could ultimately create its next wave of growth rather than destroy
Artificial intelligence may be disrupting India's $280-billion IT services industry today, but the technology could ultimately create its next wave of growth rather than destroy it, according to Rohan Korde, Fund Manager at Baroda BNP Paribas Mutual Fund.The fund house believes the recent correction in IT stocks reflects concerns over tariffs, AI-led disruption and weak near-term earnings guidance, but says the long-term opportunity lies in the industry's transition from pilot AI projects to large-scale enterprise deployments. Korde sees emerging demand for data engineering, cybersecurity, cloud integration, specialised semiconductor infrastructure and AI-enabled hardware as potential growth drivers, even if traditional revenue streams come under pressure."While the existing revenue pools may get impacted, every disruption provides an opportunity as well, as has been witnessed in the past," he said in an interview with ETMarkets.Edited excerpts from a chat:The governmentâs policy thrust is firmly behind manufacturing, yet you are more bullish on services. What is the market underestimating about the services opportunity?While there has been a visible thrust on the manufacturing sector through various measures such as introduction of Production Linked Incentives (PLI) and promoting Make in India, it is also quite noticeable that the service sector has not been ignored. Various policies such as national Tourism Policy 2015, Education Policy 2016, Health Policy 2017, and initiatives like the Mission on Pilgrimage Rejuvenation and Spiritual, Heritage Augmentation Drive (PRASAD) to name just a few, have helped drive growth in the services sector as well. Interestingly, The Gross Value Added by the Services sector has averaged 7.1%* year on year growth in the past 20 years, higher than both Industry and Agriculture average growth rate.Which segments within servicesâfinancials, IT, healthcare, telecom, travel or digital businessesâoffer the strongest earnings visibility over the next three to five years?The services sector offers multiple sectoral opportunities to invest in: Financial Services, Information Technology, Consumer Services, Power, Healthcare, Telecommunication, Oil & Gas, Telecommunication, Services, and Media & Publication.
A lot of companies within these sectors have been growing at a fair clip in the past 5 years. We project good growth visibility in Financial Services (on low credit penetration and financialization of savings), Healthcare (aging demographics, expanding middle class, lifestyle diseases and wellness focus, and potential to see increase in medical value tourism), and Consumer Services (rapid digital acceleration boosting growth in e-commerce and quick commerce driving volumes across audience).Indian IT services face uncertainty from AI-led disruption. Do you see AI as a threat to existing revenue pools or as the sectorâs next growth driver?The IT Sector has corrected by 23% over the last 1 year led by concerns around uncertainty led by tariffs and AI dominance. Even the growth guidance for FY27 remains weak, though the sector is a beneficiary of the weaker local currency. So, while the impact on stock prices has been immediate, there hasnât been adequate clarity on how the opportunities might manifest. However, there can be potential prospects as the move from pilot AI projects to scaled enterprise deployments occur, which may be in the form of massive data engineering, new cybersecurity frameworks, or cloud integration & architectures and specialized semiconductors (GPUs, NPUs, TPUs), edge-AI devices, and data center infrastructure on the hardware side. To sum up, while the existing revenue pools may get impacted, every disruption provides an opportunity as well, as has been witnessed in the past.Financial services represent a significant part of the listed services universe. Where do you currently see the best risk-rewardâbanks, NBFCs, insurers, asset managers or capital-market businesses?Within the Financial Services space, we have a preference for Mid cap banks, NBFCs and platform companies in that order.From a broader market perspective, do you expect returns over the next year to be driven by earnings growth, valuation expansion or sector rotation?Generally, the markets do well when there is confidence in the earnings growth trajectory.
The BriefWire