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Hardware spending takes centerstage
The global technology spending landscape has undergone a significant shift, with companies channeling investments toward data centers, processors, and semiconductor infrastructure rather than software services. This trend has propelled hardware manufacturers like Nvidia and Asian semiconductor players to new heights while creating headwinds for software-as-a-service (SaaS) companies and IT services providers.
“The incremental allocation by most enterprises has been toward hardware,” Mathai explained in a recent interview with ET Now. “The software segment, which includes SaaS companies, has been underperforming for some time and has been hit hard year-to-date.”
This shift in spending priorities has contributed to notable declines in large-cap IT stocks, with some experiencing drops exceeding 3% in individual trading sessions over the past week—an unusual occurrence for these typically stable names.
Sentiment vs. fundamentals: A disconnect emerges
Despite the negative market sentiment, Mathai emphasized that the fundamental business performance of IT services companies remains relatively stable. Revenue growth from SaaS companies hasn’t declined proportionately to their stock price movements, suggesting the selloff is driven more by investor sentiment than deteriorating business metrics.
Recent quarterly results from major global and Indian IT service vendors show improvement in earnings trajectories, with growth returning to the banking, financial services, and insurance (BFSI) sector alongside some discretionary spending recovery. Several companies have begun reporting AI-related revenues, though Mathai notes this may eventually be absorbed into standard service offerings.
“You have seen a fair bit of growth coming in BFSI and also some part of discretionary growth,” Mathai observed. “The order books are looking fine, and some of the large verticals are turning.”
The AI adoption timeline
A critical factor affecting IT services demand is the pace of AI adoption by Fortune 500 companies and other large enterprises. While the technology industry has embraced AI infrastructure rapidly, enterprise implementation remains slower than many anticipated.
Mathai draws parallels to the 2016-17 technology migration period centered on SMAC (social, mobility, analytics, and cloud), which experienced initial transition pains before widespread enterprise adoption drove demand for IT services.
“Our expectation is when AI adoption happens, some of these services players should witness increased volumes,” Mathai said. He acknowledged potential near-term pricing pressures as companies negotiate upfront costs but expects volume growth to compensate over time.
Valuation case strengthens
The recent price declines have made IT sector valuations increasingly attractive. Mathai noted that his firm maintains allocations to the sector and sees the current valuation levels as favorable entry points for investors with appropriate risk tolerance.
“The valuations have become cheaper and you have had a fair bit of earnings uptick in most of these names,” he stated, expressing optimism about the sector’s prospects at current price levels.
Consumer durables emerge as opportunity
Beyond IT services, Mathai identified consumer durables as another sector presenting value opportunities. These stocks have experienced significant drawdowns due to seasonality and competitive pressures, creating potential entry points ahead of what could be a strong summer selling season.
“With rising incomes and the possibility of a decent summer going ahead, some of these pockets can look attractive,” Mathai said, revealing that his fund has added positions in this space over the past quarter.
Auto sector: Selective opportunities remain
While the automotive sector has re-rated sharply in recent months, Mathai suggests most segments now reflect fair valuations relative to long-term averages. His firm has trimmed positions in the sector after benefiting from earlier allocations.
However, mass-market consumption within autos, particularly two-wheelers, still offers promise. Recent GST cuts have improved affordability, and stable income growth could drive sustained volume increases in this segment.
Capital goods face valuation hurdles
The capital goods sector presents a more complex picture. While earnings could improve from last year’s seasonally weak performance, Mathai expresses concern about current valuation levels despite links to power sector development.
“The earnings uptick can happen from last year. It is a question of whether you are willing to pay for that earnings at the current juncture,” he explained, noting that his fund previously exited positions in this space due to valuation constraints.
Some capital goods companies have experienced order deferrals, and demand hasn’t maintained the robust pace seen in previous years, potentially creating recurring challenges.
Energy sector: Mixed outlook
Within energy, Mathai favors utility companies that could benefit from declining input prices. However, he views upstream and downstream energy plays as more dependent on crude oil price movements, which currently appear to be trending upward—a potential headwind for oil marketing companies.
Investment implications
For investors considering IT sector exposure, the combination of improved earnings trends and compressed valuations presents a potentially attractive risk-reward profile, particularly for those with medium to long-term investment horizons. The current sentiment-driven selloff may offer opportunities to build positions before enterprise AI adoption accelerates.
However, near-term volatility is likely to persist as markets digest the shifting technology spending landscape and await clearer signals of AI-driven demand for IT services.
The broader message from Quantum AMC’s positioning suggests selective opportunities across consumption-oriented sectors, with particular attention to valuations relative to earnings growth prospects and cyclical demand patterns.