IT sector: Beaten down but not out
Devalkar acknowledges the AI disruption is unlike any technological shift the sector has faced before. While past technology waves — cloud, digital transformation, mobility — consistently handed Indian IT companies a windfall through legacy modernization contracts, AI carries a double-edged sword.
“Whenever there is some technology change, such big takeaways give opportunity to companies. It accelerates modernisation of legacy systems in large corporates,” Devalkar noted. The deployment gap in enterprise modernization remains substantial, and that alone keeps the long-term IT story intact.
The critical difference this time, however, is deflation. AI is widely expected to compress billing rates and reduce the volume of human effort required to deliver the same outcomes. Experts Devalkar tracks estimate AI could be anywhere from 3% to 5% deflationary for the sector — a meaningful headwind that explains why market consensus on IT earnings growth has been revised down to low-to-mid single digits.
So are the stocks cheap enough to absorb this? Partially. On dividend yield and free cash flow yield metrics, Indian IT names look reasonable after the recent correction. But Devalkar is careful to note that when benchmarked against global technology peers, Indian IT companies don’t yet scream deep value. The verdict: reasonably priced, not a screaming buy, but worth watching closely for investors with a longer horizon.
Where the smart money is flowing
Beyond IT, Devalkar is constructive on two sectors that have seen genuine fundamental improvement over the past six months.
Automobiles, particularly commercial vehicles, are flashing early recovery signals. CV volumes have shown consistent improvement over the past two to three months, and the tractor segment continues to perform well. The near-term risk to watch, according to Devalkar, is commodity cost inflation and whether automakers can pass it through to consumers — especially given model life cycle constraints that limit pricing flexibility. Companies that manage this pass-through effectively will separate themselves from those that don’t.Banking and financials represent Devalkar’s other high-conviction area. Credit growth is visibly recovering across segments — a trend that showed up clearly in Q3 results, particularly in corporate loans. Equally important, the NPA cycle appears to have bottomed out. With RBI having eased liquidity conditions over the past 12 to 18 months, the sector is now beginning to reap the rewards of that policy shift. Axis MF has been building positions here, and Devalkar confirms meaningful flows have followed over the past three to six months.
On the perennial PSU versus private bank debate, Devalkar offers a nuanced take. Private sector banks have been significantly derated relative to their pre-COVID multiples — making them relatively more attractive on a historical comparison basis. Meanwhile, PSU banks have genuinely earned their re-rating through market share gains, improved turnaround times, and better asset quality. Axis MF holds both in its portfolios, suggesting this isn’t an either-or decision.
The capex and manufacturing theme stays strong — at a price
India’s infrastructure and manufacturing buildout remains a compelling long-term narrative. Cement, steel, cables and wires, capital goods linked to power sector capex and electrification — all of these have delivered strong volume growth. Devalkar is quick to add, however, that this optimism comes with a valuation caveat: many of the best opportunities in this space remain expensive.
That said, the electrification theme in particular carries global tailwinds strong enough that Axis MF continues to hold meaningful exposure across multiple funds despite stretched valuations.
Where Devalkar is hitting the brakes
If there is one segment where Devalkar sounds most cautious, it is consumption — and specifically FMCG. The earnings growth trajectory for the sector simply doesn’t justify the multiples at which many FMCG names continue to trade. Axis MF has been underweight on this space.
The adjacent new-age consumption plays — modern retail and quick commerce — are not necessarily bad businesses, but valuations remain elevated and execution will need to be consistently strong to justify current pricing. Devalkar’s approach here is selective rather than a blanket avoidance: some names in the space have earned a place in Axis portfolios, but the bar for inclusion is high.
The bottom line for investors
The AI disruption that has rattled global markets is not a crisis for Indian IT — but it is a structural reset of growth expectations. Investors looking for deep, immediate value in IT may be disappointed, while those with patience and a valuation discipline may find the current levels form a reasonable entry zone over a multi-year horizon.
Beyond tech, the clearest fundamental tailwinds right now sit in banking — where credit growth, easing liquidity, and NPA cycle recovery are all aligning — and in autos, where the CV and tractor recovery is gaining credibility. Manufacturing and capex themes remain structurally sound but require valuation discipline.
Consumption, particularly FMCG, is where risk-reward looks most unfavorable in the near term.
In a market where macro noise is running high, Devalkar’s framework is straightforward: follow the earnings delta, respect valuations, and stay nimble.