Expert view: Chockalingam Narayanan, Head Equities – PMS and AIF at ICICI Prudential AMC, says in the current environment, he favours value over growth, current earnings over distant earnings, and asset-heavy businesses over asset-light businesses. In an interview with Mint, Narayanan said IT stocks are not outright contra bets, as it remains to be seen how their business models adapt to AI. Discussing foreign capital flows, Narayanan said FII (foreign institutional investor) selling is not a rejection of India's structural story but rather part of asset allocation, currency, and relative valuation. Edited excerpts:
We believe higher oil prices do not necessarily translate to earnings growth being impacted across the universe. What changes is the composition of earnings growth.
At the aggregate Nifty 500 level, we have seen double-digit earnings growth of 12-13% YoY in Q1FY27, but if one looks deeper, there will be clear winners and losers.
Commodity producers, such as metals producers, tend to benefit from higher commodity prices, while commodity consumers, such as autos and other input-intensive businesses, have seen margin pressure.
Therefore, the current market environment calls for greater differentiation. We tend to prefer businesses with strong balance sheets, resilient earnings, and pricing power.
In the recent past, India has relatively underperformed global markets. However, there is no uniformity in terms of valuation.
We have moved from an environment where almost everything was working (2021-2024) to one where earnings visibility, balance sheet strength, cash flows, and valuations are likely to differentiate winners from losers.
The opportunity is there, but it needs to be approached selectively. The near term is likely to be a period where stock selection will matter more.
For India, the immediate concern is the impact of AI on the traditional IT services business model.
If AI drives greater automation and changes how technology services are delivered, it could put pressure on pricing and, over time, on the terminal growth assumptions of some IT companies.
In the near term, enterprises may delay discretionary technology spending as they reassess investment priorities. However, in the medium- to long-term, AI is expected to drive a new technology investment cycle centred on cloud migration, data engineering, cybersecurity, AI implementation, and platform modernisation.
Indian IT companies with deep client relationships, proven execution capabilities, and the capability to move up the value chain may have the potential to monetise AI-led opportunities.
Similarly, as this ecosystem is being built, certain players are likely to benefit from participating in the build-out of data centres, energy infrastructure, etc., and they stand to gain depending on their responsiveness to this demand.
In other sectors, particularly where companies can use AI to their advantage, sales velocity can get a leg up for those who adopt it earlier than their peers.
In summary, the impact is likely to be varied and nuanced. As an economy, we can benefit from this in the medium- to long-term, though there is uncertainty about who the winners and losers will be.
