The current valuations of IT stocks are already high, and job creation in the sector will be difficult with the advent of AI, according to Ashwini Agarwal, founder of Demeter Advisors.
IT companies will use AI for basic-level coding and testing services, which will help grow revenues but make job creation challenging, he told NDTV Profit.
“I am a little bit worried about IT because valuations are not that cheap in the historical context, and I think job creation in the sector is going to be difficult. Companies might still do okay because they will deploy AI, which will require less manpower to write basic code. A lot of AI or automation might be deployed in testing services, so they might be okay in terms of growing their revenue a little bit and managing their margin. But for job creation, it’s going to be very difficult,” he said while talking about the prospects of IT companies.
In contrast, Agarwal feels much more confident about the financial sector, emphasising that lenders’ balance sheets are significantly stronger than they were a few years ago.
He added that while credit costs are likely to normalise going forward, the regulatory environment remains vigilant.
“Financials, I feel much more confident about. I think a lot of the focus on microfinance and unsecured loans has taken the sheen away from a lot of lenders, but balance sheets are much stronger than they were back in 2017 and early 2018. Back then, a similar sort of scare set in, but the regulator has been very vigilant over the last several years. For mainstream banks, the worst of the credit cost situation is behind us, and credit costs going ahead will normalise,” he said.
Ashwini Agarwal stressed the importance of judging companies by their valuations rather than categorising them strictly as large caps or small caps. For small caps, it is crucial to assess a company’s balance sheet and leadership before deciding whether it is worth investing in, he said.
“In my view, it’s all about valuation. If you find the right value with the right growth profile and a balance sheet and management that you can trust, small caps are great and give you a much better alpha compared to large caps. If the market is driven by FIIs, then large caps may do slightly better than small caps. But if you take a 12-month, 24-month, or 36-month view and find small caps with the right characteristics, I think you will make more money. So, it’s a very bottom-up market,” Agarwal mentioned.
Commenting on FII inflows into India, he noted that a weak US dollar could significantly boost them.
“By whatever the Trump administration seems to be doing, their inclination appears to be to weaken the dollar. If they succeed, that’s positive for flows into India,” Agarwal said.
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