Vikas Khemani of Carnelian Asset Management suggests the recent IT sector correction offers potential value, arguing that AI will drive industry growth rather than shrink it. He notes that while US AI spending enthusiasm is cooling, long-term opportunities exist for companies that adapt quickly, though selective stock picking remains essential for investors.
What Happened
Indian IT stocks have faced an extended period of underperformance due to concerns over artificial intelligence, slowing global technology spending, and reduced discretionary client budgets. However, Vikas Khemani, founder of Carnelian Asset Management, recently stated that the current market correction may present a value opportunity for long-term investors. He argues that fears regarding AI's threat to traditional IT services are likely overstated, drawing historical comparisons to past shifts such as Y2K and the move to cloud computing, which ultimately helped the industry scale.
The AI Transformation Narrative
Investors have been worried that AI could replace human-led services, leading to a loss of business for traditional IT firms. Khemani suggests the reality is different, noting that IT companies are increasingly adopting AI as a tool to improve their own internal efficiency and reduce costs. Rather than replacing the service model, AI is becoming a component of the digital transformation projects that IT firms manage for their global clients. The key for investors is to identify which companies are integrating these technologies fastest to maintain or improve their profit margins.
US Market Trends and ROI Focus
One major shift identified by market observers is the cooling of AI-related enthusiasm in the United States. After a period of intense spending, American companies are now beginning to scrutinize the actual return on investment (ROI) from their AI projects. Concerns over implementation challenges and trust in AI outputs are causing firms to be more selective. For the Indian IT sector, this transition from speculative "AI frenzy" to demand for measurable business outcomes is a critical phase that will separate companies with strong execution capabilities from those struggling to adapt.
Why Selective Stock Picking Matters
Not all IT companies will benefit equally from this technological transition. Large-cap firms often have the scale to invest in new capabilities, but mid- and small-cap companies may offer different growth profiles if they focus on niche technologies or specific industry verticals. Investors are being advised to look beyond general sector movements and focus on the individual financial health, management quality, and ability of specific companies to pivot toward higher-value services.
What Investors Should Track
While the long-term outlook remains a point of debate, investors should watch several factors in the coming quarters. These include management commentary on discretionary spending trends, the pace of AI-driven project wins, and any shifts in operating margins as companies balance the cost of new technology with client pricing pressure. Finally, keeping an eye on the US macro environment remains essential, as a significant portion of Indian IT revenue is derived from North American clients who are currently re-evaluating their technology budgets.