Amid an ongoing global selloff in technology stocks and rising anxiety about artificial intelligence eroding white-collar employment, Nilesh Shah, Managing Director of Kotak AMC, is urging investors to resist the temptation to reach a verdict too quickly. Speaking to ET Now, Shah laid out a carefully balanced view: the AI-driven disruption of India’s IT sector is neither a myth nor an imminent catastrophe — and the broader Indian market, though not cheap, is pricing in a return to double-digit earnings growth that the fundamentals are beginning to justify.
IT sector: A disruption without a clear verdict
Shah was direct about the limits of what anyone can confidently say about AI’s impact on IT right now. “As of today, it is too early to say which way the IT sector will get impacted by AI,” he said. When Kotak’s analysts speak with IT company management, the consistent refrain is that no customer has cancelled a contract because of AI — at least not yet. That is a meaningful data point, though not necessarily a reassuring one for the long run.
More importantly, he argued that India’s top IT firms have navigated technological paradigm shifts before. The Y2K transition, the move from on-premise servers to cloud infrastructure when SaaS emerged, the shift from application development to application management — each of these waves was predicted to marginalise Indian IT, and each time the sector adapted. Shah believes this track record deserves more credit than market sentiment is currently giving it.
“AI developers talk about replacing all white collar jobs in 18 months. But IT companies point out that a software developer spends only 16 to 20 percent of their time writing code. The rest is understanding client requirements, planning workflow, and thinking through problems.”
The nuance here matters enormously. If the bulk of a developer’s value lies in understanding, communicating, and problem-solving — rather than the act of coding itself — then AI tools that automate code generation may augment productivity without eliminating headcount. That, at least, is the case the IT companies are making. Shah is not fully buying it, but he is not dismissing it either.
His framework for picking IT stocks at this juncture is deliberately stock-specific. Small and mid-cap IT companies, he suggested, may actually be better placed than the large caps to leverage AI advantages — they are more agile, less encumbered by legacy organisational structures, and quicker to pivot their delivery models. Large caps could surprise on the upside, but he treats those as exceptions rather than the rule. His overall stance: watch, gather evidence, stay selective, and avoid high-conviction calls in either direction.
Advice to retail investors: Step back and let professionals lead
For retail investors sitting on losses in IT stocks accumulated over the past two years, Shah’s advice was notably candid — and somewhat sobering. He acknowledged that predicting when frontline IT names will recover is simply beyond anyone’s current ability. “There are times when you have to accept that you do not know what is happening,” he said — a rare admission of uncertainty from a senior fund manager. His recommendation: delegate. Whether through mutual funds, Portfolio Management Services, or Alternative Investment Funds, retail investors are better served by professionals who are actively meeting company management and attending analyst days — as Kotak’s own team was doing, with analysts at a major IT company’s AI day even during the interview.
On capital allocation: Smart money reads through the short-term pain
A concern gaining traction in global markets is that IT companies — and hyperscalers — may curtail dividends and buybacks to fund massive AI infrastructure investments, effectively transferring returns from shareholders to data centres. Shah pushed back on this with a first-principles argument rooted in valuation theory. “The smart investor knows that today’s share price is the net present value of future cash flows,” he said. If capital invested today generates meaningfully higher cash flows in the future, a rational market will discount that into the current price — even if near-term shareholder returns dip.
The caveat he stressed, however, is capital allocation discipline. Not every dollar spent on AI infrastructure will be well-spent. Shah pointed to the example of a commodity company that funded expansion through internal accruals with rigorous capital efficiency — and delivered returns comparable to some of India’s best FMCG, IT, and banking names. The lesson: markets reward intelligent reinvestment, but they will eventually punish undisciplined spending regardless of how compelling the strategic narrative sounds.
Q3 FY26 earnings: The real number is better than it looks
Shah’s most concrete and arguably most important observation concerned the recently concluded December quarter results. On the surface, Nifty 100 profit growth came in at a tepid 0.8% — a figure that attracted considerable concern. But Shah flagged a one-time distortion: the implementation of a new labour code introduced a roughly ₹12,000 crore charge across corporates. Strip that out, and profit growth for the quarter jumps to a far more respectable 9.8% — firmly in double-digit territory.
On-ground economic signals — momentum building
- Cement companies running with under 2 days of factory-level inventory — indicating strong demand absorption
- Automobile dealer inventories at approximately 7 days — lean and healthy for the sector
- Steel prices holding firm despite recent hikes, with demand remaining robust
- Q3 FY26 marks the first quarter in six with turnover growth crossing into double-digit territory
The rupee depreciation created a secondary drag on reported numbers, and Shah expects a residual impact in the March 2026 quarter as well. But he is not concerned about the underlying trajectory. On-the-ground indicators — from cement and automobile inventories to steel demand — all suggest economic activity is picking up meaningfully. For the first time in six quarters, revenue growth has crossed into double digits. Shah expects this momentum to carry through both FY27 and FY28, sustaining the kind of earnings growth that the broader market is beginning to price in.
Valuations: Reasonable, not cheap — and that is fine
Where does that leave overall market valuations? At approximately 20 times forward earnings, Shah’s assessment is straightforward: the market is at fair value. It is not the screaming bargain that investors who missed the post-COVID rally might hope for, but it is a far cry from the frothy 24 times forward PE seen in September 2024 — a period when earnings ultimately failed to justify that premium and the market corrected. With earnings now visibly recovering and the trajectory toward double-digit growth increasingly credible, holding at 20 times is a rational market response, not investor complacency.Shah’s overall message to investors is one of measured patience. The AI disruption in IT will take time to fully reveal its winners and losers. The earnings recovery is real but still needs confirmation over the next two quarters. And the market, priced at fair value, is neither inviting reckless optimism nor warranting panic. In a climate of high uncertainty, that kind of sober clarity is itself worth something.