By Sunil Subramaniam, Financial Sector Veteran & Ex-MD of Sundaram Mutual Fund, Chennai
The debate around Generative and Agentic AI has been the central driver of both the deep derating and the subsequent relief rally across Indian IT.
- Causes of derating
1A. Deflation of the Billable-Hour Arbitrage : With agentic coding tools automating legacy modernization (e.g., COBOL, legacy Java) and quality engineering.
1B. New enterprise-grade AI transformation projects will take many quarters to scope and deploy and resultant revenue streams to scale.
1C. Margin Compression from Tool Licensing: Transitioning to outcome-based pricing requires IT firms to absorb compute and software licensing costs (LLM tokens, developer seats), compressing operating margins before cost structures adjust.
- Why the Sector Rallied
2A. Challenges to Hyperscaler AI ROI: Global markets have began questioning the hundreds of billions spent on foundational models and AI infrastructure without commensurate enterprise revenue.
2B. The recent rally was also driven by short-covering, valuation mean-reversion, and defensive rotation rather than an acceleration in organic volume growth.
Analysis
- Decision based on IT business model :
The threat has not disappeared—it has merely evolved from an existential risk into a bifurcation of business models as follows:
3A. Commoditized Tier-1 players relying on Staff Augmentation
Recommended Action : Book Profits on Bounces. Multiple expansion will remain capped by muted volume growth.
3B. Players focused on Enterprise Data & Cloud Integrators
Recommended Action :
Hold / Staggered Accumulation. As these are Resilient cash generators yielding steady dividends and buybacks.
3C. Specialized Mid-Cap players focused on ER&D
Recommended Action:
Accumulate on Dips. Structural volume growth remains intact.
- Decision based on Based on the investor type:
4A. For existing investors at lower levels:
4A1. If exposure is normal (8–12%):
Hold through the cycle.
Large-cap Indian IT delivers solid return on capital (ROCE), high free cash flow yields, and reliable dividend payouts. Selling high-quality compounders simply because they rallied interrupts long-term compounding unless the underlying thesis has broken.
4A2. If IT exceeds 15–18% of your total equity portfolio:
Trimming commoditized names during this liquidity bounce is prudent.
4B. For investors wishing to take new exposure to IT :
4B1. Do not chase broad-basket ETFs or index funds under the assumption that AI risks have evaporated.
4B2. Favour balance sheets with high net-new deal conversions, strong BFSI exposure (which rebounds earliest in rate cycles), and proven ER&D capabilities over pure-play staff augmentation models.
4B3. Avoid lump sum and Use SIP mode: Accumulating quality large-caps and resilient mid-cap ER&D players over a 3- to 6-month window offers favorable risk-reward.
