Daily Voice: AI disruption real for IT services, financial impact still uncertain, says Axis Max Life's Sachin Bajaj

Sachin Bajaj is the EVP and Chief Investment Officer at Axis Max Life Insurance

• AI threat to traditional IT services real, but revenue and profitability impact still uncertain
• Cautious approach is advised given the volatile geopolitical environment
• Sectors on radar - Financials, new-age commerce, capex and manufacturing related beneficiaries

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“AI is going to impact traditional IT services companies, but the extent of its impact on revenue and profitability is still uncertain,” said Sachin Bajaj, EVP and Chief Investment Officer at Axis Max Life Insurance, in an interview with Moneycontrol.

In anticipation of some of these risks, the Nifty IT index has already fallen over 20 percent in the current month.

Meanwhile, he advised a cautious approach given the volatile geopolitical environment and its subsequent impact on various asset classes, including currency, equity flows, and commodities.

He is of the view that an improvement in nominal GDP growth would be a precursor to earnings growth returning in FY27.

Do you believe the tariff concerns are over now, especially after the Supreme Court ruling, even though Trump may look for other ways to maintain tariffs?

As a result of the recent judgment, I believe that tariff-rate-related concerns are behind us. Tariffs under IEEPA are reduced, but tariffs under other sections remain unaffected. While the actual tariff may not go down to 10% or 15%, the risks of very high tariffs have reduced in my view.

What lies ahead for trade deals signed or pending with the US after the Supreme Court verdict, Trump’s remarks, and the executive order?

The tariff situation remains fluid following the Supreme Court verdict. While existing agreements are likely to remain intact, evolving policy dynamics make definitive predictions difficult at this stage.

Do you expect the IT sector to regain momentum only when double-digit earnings growth begins to materialise?

AI is going to impact traditional IT services companies, but the extent of impact on revenue and profitability is still uncertain. It will take some time before clarity emerges on the medium to long-term implications.

While the near-term earnings growth trajectory will help the share price, any sustainable outperformance will need a better understanding of how the business environment is going to change and which companies are able to adapt better.

Do you rule out any further major downside in IT stocks from here, given that most of the negatives appear to be fully priced in?

In anticipation of some of these risks, the Nifty IT index has fallen over 20 percent in the current month. We believe it is still an evolving scenario, and the extent of AI's impact on the revenue and profitability of Indian IT services companies is still not clear. One needs to follow a wait-and-watch approach.

Which sectors are on your radar for the year ahead, considering current valuations and expected earnings growth?

Some of the sectors on our radar are Financials, Healthcare (CDMO and Hospitals), new-age commerce, capex, and manufacturing-related beneficiaries.

Do you expect FII flows to return to India in the coming months?

Over the past year, the Indian stock market has underperformed other markets due to factors such as higher relative valuations and a lack of an AI theme. As a result, India’s valuation premium over the Emerging Markets Index has corrected to its long-term average.

Once earnings growth picks up, there is a strong likelihood of FIIs coming back to Indian equity markets. Some large IPOs, which are expected during the year, should also see good FII participation. Further, the US-India trade deal is a positive development from an FII flow point of view.

As we approach FY27, is it better to remain cautious before assuming double-digit earnings growth?

A cautious approach is advisable given the volatile geopolitical environment and its subsequent impact on various asset classes, including currency, equity flows, and commodities etc. In our view, an improvement in nominal GDP growth would be a precursor to earnings growth coming back in FY27.

Is it advisable to maintain a bullish view on silver while following a buy-on-dips strategy?

No comment. However, I advise investors to remain watchful due to the extremely high volatility in certain precious metal prices.

 Are you bullish on the auto and auto-ancillary space?

The auto sector's growth outlook is closely linked to overall economic growth. The sector has seen strong growth over the past year on the back of the GST rate cut, rural revival, and higher exports. Positive momentum in the economy should have a favourable impact on the fortunes of the sector. To that extent, we are constructive on the industry. Portfolio positioning remains a function of relative valuation and bottom-up stock picking.

Do you expect the market’s uptrend to accelerate only after clear signs of double-digit earnings growth emerge?

In the short term, markets can be influenced by various factors such as liquidity, flows, and sentiment; however, in the long run, sustained market returns require visibility into double-digit earnings growth.