IT Stocks: Assessing the Contrarian Valuation Case with S Naren and Rajeev Thakkar

IT Sector Attractiveness Revisited Amid AI Concerns

Despite concerns surrounding artificial intelligence (AI), slowing discretionary spending, and muted growth guidance, industry CIOs are beginning to see parts of the IT sector as attractive again. The sector faces genuine disruption risks from AI, but the current setup is viewed as a "contrarian valuation call" by ICICI Prudential Mutual Fund CIO S Naren.

Speaking at the Groww India Investor Festival 2026 in Mumbai on May 9, Naren noted that the market has significantly de-rated IT companies due to fears that AI could reduce demand for traditional software services work. While valuations have become cheaper and balance sheets remain strong, investors are still debating whether the sector is facing a structural disruption or a cyclical slowdown linked to global technology spending and AI capital expenditures.

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According to Naren, institutional positioning in the sector is still far from aggressive despite recent buying. Compared to the benchmark, the weightage of IT in the sector is not as high as it was in 2020, when weightages in sectors like telecom, power, and PSUs were significantly higher.

Naren also pointed out that if AI-led disruption becomes as severe as some fear, its impact would likely extend well beyond IT services alone. He suggested that foreign institutional investor allocations to the sector remain unusually low.

PPFAS Mutual Fund's CIO Rajeev Thakkar countered that Indian IT companies have repeatedly survived existential concerns over the past three decades. Thakkar noted that the industry has historically adapted to technological change rather than being displaced by it.

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Thakkar argued that productivity gains from AI may ultimately expand demand rather than shrink it, drawing parallels with industries such as telecom and discount broking. He referred to the economic principle known as Jevons' Paradox, where lower costs can lead to higher overall consumption.

According to Thakkar, even assuming that the work of 10 developers can now be done by 5 engineers, reducing costs for IT services companies, it does not necessarily mean that profit will go away fully. Thakkar believes that productivity improvements will lead to increased demand, as cheaper goods and services are consumed in greater quantities.