Infosys and TCS Can Hedge Risk to Fancy AI Stocks 

In the drop-down menu of sector quotes on Equitymaster, we have India's Big Tech Stocks.

The irony is, none of these stocks are the biggest technology firms in terms of marketcap or revenue.

The reason we call them big is because they have the potential to get much bigger over the years. So much that a few could even replace the current IT behemoths on the indices at some point.

Why am I bringing your attention to these stock quotes?

Well, because the stocks of technology companies have seen wild swings over past two years. Not just in India, but globally.

The stocks on our Technology watchlist have, on average, seen at least 30 to 50% fall and rise during this time frame.

But globally the story is much bigger.

Back in 2021, it was easy to claim that there was a bubble in tech stocks. Unprofitable companies were worth tens of billions. IPO stocks doubled on their debut.

No one batted an eyelid when companies like Paytm, Zomato and Policy Bazaar came to the markets with no profits. The more speculative the investment, the higher the price would go.

Pockets of speculative stocks grabbed headlines.

Remember the stock of US broking entity Robinhood? Such stock stories kept investors distracted.

Meanwhile, rapid change was unfolding in earnings growth of global tech behemoths like Apple, Alphabet, and Meta.

Apple, Alphabet and Meta saw earnings doubling between 2019 and 2022. Amazon's earnings nearly tripled during this period.

Also, after a substantial rebound in valuations the stocks are back to their highs. In 2023 itself, the Nasdaq 100 is up over 30% year-to-date.

All this on the back of a technology that has captured the imagination of technology geeks and users alike. It goes by the name of Artificial Intelligence or AI.

The stock price of US tech company Nvidia soared by 25% after the management predicted a massive boom in demand for its computer chips in the latest earnings call.

The company expects to meet the needs of AI products such as ChatGPT.

The share price of Nvidia has already more than doubled over the course of 2023 amid huge optimism over the rapid progress of generative AI products. These require massive datacentres full of semiconductor chips to operate.

So, its AI business-led valuation pushed Nvidia past the trillion-dollar marketcap benchmark. This allows Nvidia into the club of few trillion dollar companies such as Apple and Microsoft. Meta was a former member.

Naturally, companies are racing to show how they will incorporate AI into their existing businesses.

Some tech experts also warn about the risk of AI to human lives. But that does not stop companies from riding the massive tailwinds that AI has to offer.

Many semiconductor chip companies outside the US are caught up in the geopolitics of the US and China amid tit-for-tat restrictions on chip exports.

Indian technology companies are seeking to take advantage of the situation to become a global hub for both, chip making and AI-led products.

As per NASSCOM, AI is expected to raise India's annual growth rate by 1.3% by 2035.

AI or Artificial Intelligence is no more a buzz word amongst geeks. You do not need a qualification in engineering. Nor do your coding skills need polishing. Without any of these, an AI tool like ChatGPT can serve you well.

Needless to say, I find even teenagers and senior citizens excited about what the AI tools can do for them.

AI stocks are current favorites for investors.

The use of AI has grown exponentially in corporate India in the last few years. Now, India has been a leader in the deployment of digital public infrastructure. So, it is natural for the government to encourage companies to accommodate AI into their model.

A pilot AI project developed by the Indian Railways, for instance, takes into account various factors such as train origin and destination, timings, class of accommodation, and availability of alternative trains. With these it automates the best possible ticket allocation. So, AI has massively helped reduce ticket booking wait lists.

In agriculture, AI is being employed through techniques such as weather pattern modelling and geospatial imaging to optimise crop yields.

The medical field is improving medical image analysis to detect life-threatening illnesses earlier and enable more effective treatment plans.

In fact, as per NASSCOM, AI is expected to raise India's annual growth rate by 1.3% by 2035.

But most of the homegrown technology companies in India are not AI native. In other words, adopting AI can make them dependent on foreign technology partners.

Meanwhile, investors looking to buy fancy AI stocks may have to shell out a fortune in terms of valuations.

However, there is a yet another technological tailwind sweeping across Indian companies. And most of it is going unnoticed.

The National Quantum Mission (NQM), was approved by the Union Cabinet in April 2023. At an outlay of Rs 60 bn over six years, the investments will be directed towards R&D for an innovative ecosystem in quantum technology within the country.

Quantum technology can be a big enabler for AI adoption. It can help swiftly tackle the most complex problems that once took years to solve. For instance, it could be about tailoring medicines to individuals' unique genetic makeup, conducting real-time analysis of financial markets, or ensuring secure communication.

What makes the technology apt for Indian tech majors to focus on is the copious amounts of data that quantum technology can process quickly.

With NQM, India joins the league of six nations that includes the US, China, Finland, Austria, France and Canada, which are leading the research in this field.

Globally, big players like IBM, Google, and Microsoft are leading the wave of Quantum Tech research.

India too is accelerating with about 15 government agencies, 25 service providers, 20 startups, and over 40 academic institutions active in the quantum technology space.

According to a Nasscom report, the industry would add about US$ 310 bn to the Indian economy by 2030.

To accelerate the adoption of quantum technologies, Indian IT companies are actively partnering with startups, companies and technical institutions to provide the know-how in quantum physics, setting up labs, and nurturing talent to build quantum applications.

Infosys has launched 'Infosys Quantum Living Labs' for all its customers across industries. Especially ones who would like to explore various use cases through quantum computing. Currently, the company sees major applications for quantum computing solutions in logistics, cybersecurity, high tech, manufacturing, BFSI, healthcare and others.

Similarly, TCS partnered with IIT Tirupati for research in quantum computing and quantum technology.

HCL Tech, Wipro and Mphasis are also investing to develop innovative solutions in quantum tech.

So, unlike AI, applications and tools for quantum technology could be homegrown for Indian tech majors.

Of course, it may be a while before the technology finds wide scale commercial adoption like AI.

But with an early mover advantage, Indian tech majors can have a huge upside once the research on quantum technology begins to accelerate their product launches.

For investors, companies like Infosys and TCS offer the opportunity to ride the massive technology tailwind at relatively reasonable valuations.

No doubt, fancy AI stocks may be the current flavour of the stocks markets. But considering the ignored Indian tech bluechips may serve well to ride India's homegrown tech boom.

So, while the resurgence of technology stocks may not be short lived, that bullishness about the potential of AI could be.

It is important that as a long term investor, you diversify your risks.

Unlike AI, applications and tools for quantum technology could be homegrown for Indian tech majors.

Of course, it may be a while before quantum technology finds wide scale commercial adoption like AI.

But with an early mover advantage, Indian tech majors can have a huge upside once the research on quantum technology begins to accelerate their product launches.

For investors, companies like Infosys and TCS offer the opportunity to ride the massive technology tailwind at relatively reasonable valuations.

So, don't be enamored by the global technology recovery. Rather stick to homegrown stories of Indian companies making headway with technology tailwinds of the future.