Why AI is Changing India's Best Tech Stocks

Little over a decade back, in 2011, American tech stocks revisited the dot-com bubble days.

Several new technology stocks like Facebook and Twitter were sparking controversy in Silicon Valley with their stock market listings.

So, stocks of tech behemoths like Apple and Microsoft had few takers.

Apple, for example, had a price to earnings (P/E) ratio of barely 15 times then. About the same as the broader US stock market.

This was despite Apple's immense profitability and dominant market position. It was already America's largest company by market capitalisation, surpassing Exxon Mobil.

But most American investors other than the likes of Warren Buffett, were too concerned about how Apple could thrive in the age of new tech stocks.

The rest...as they say, is history. The stock of Apple went up over 16 times since 2011. So did Microsoft.

In comparison, the stocks of the new age stocks like Facebook and Twitter had a volatile and muted outing.

Nvidia remained a penny stock for 17 years after the dot-com bubble burst. But since 2019, the stock has gained 10x!

The moral of the story is that new technology may not always make old technology stocks redundant. It is wrong to assume that every decades old technology giant is the next Xerox.

Nor is every newly listed tech startup, buoyant with venture capital-like valuations, the best kind of tech stock to create wealth.

That brings us to the market apathy for homegrown technology majors TCS, Infosys, and HCL Tech.

Believe it or not, today, a newly listed drone stock, Droneacharya Aerial Innovations, gets 4 times the valuation that TCS does.

This is not to say that the drone stock does not have growth prospects. Or may not grow at a slightly faster clip than TCS for few years.

But the P/E multiple of 137 times awarded to the drone stock puts valuations of India's largest tech stocks to shame.

Not just that. Even the stock of a public sector entity focused on technology for Railways, IRCTC, fetches double the multiple that TCS or Infosys do.

Meanwhile, the likes of newly listed Zomato and Paytm (One 97 Communications) fetch 5 to 10 times book value, even as their earnings (EPS) struggle to get into positive territory.

The reason I am making these comparisons is because I do not see these businesses transforming like TCS, Infosys, and HCL Tech will, in the next decade.

A transformation that will not only change how the tech giants cater to their customers. But also, how the customers respond to such innovation.

The transformation I am referring to is AI or artificial intelligence led tech. More specifically generative AI, which is user driven.

The primary difference between generative AI and traditional AI lies in their objectives and functioning. Traditional AI aims to perform specific tasks based on predefined rules and patterns.

Generative AI goes beyond this limitation and strives to create entirely new data from the user data that resembles human-created content.

The hype around generative AI (gen AI) began after the onset of OpenAI's ChatGPT. With this, technology shifted from being restricted to software codes to something that even school-going kids could use.

I do find use of ChatGPT for 'downloading' school projects, writing articles and creating readymade images counterproductive. But the use cases of the technology are multiplying.

ChatGPT and its related AI technologies are here to stay. Google's Bing ChatGPT is making its own niche. Even TCS' own ChatGPT like AI tool is set to debut soon.

Moreover, this is not just for low impact or less critical objectives. Information and knowledge that is often stored away in repositories was available through hundreds of Google searches.

AI offers such medical, legal, financial, historical and educational insights available, in the most user-friendly way, with single click.

It in fact goes beyond the factual and joins the dots for even creative content, whether in words or images. Such technology cannot and should not be wished away. But we must be careful.

A recent legal case made the news because the lawyers had used ChatGPT to argue the case. Turned out the AI cited cases were literally made up. As you might imagine, this did not work out well for the lawyers.

AI does have the word 'intelligence'. But at the end of the day, these are still algorithms and computers processed data that are devoid of the human emotion and common sense.

Not just news articles but public release content as press releases, blog posts, sales copies, and biographies can be artificially produced with such AI led content. But without fact checking such content can lead to hazardous consequences.

Even our national defence is increasingly AI software-based. The modern combat soldier is embedded in a web of software that provides intelligence, communications, logistics, and weapons guidance.

Software-powered drones launch airstrikes without putting human pilots at risk. Intelligence agencies do large-scale data mining to uncover and track potential terrorists.

Sifting through enormous amounts of data, looking for patterns and anomalies, has helped shape our understanding of space launches.

To an extent it helped come up with lifesaving medication like the vaccines for Covid-19. We are told, ChatGPT is even acting as fund manager for few hedge funds.

So vast amounts of data can be analysed, understood and explained to humans by AI tools that are being created by technology majors.

A few months back, all Indian tech majors announced big moves in the generative AI space.

Wipro announced that it will spend as much as US$ 1 billion over three years to build capabilities. TCS, HCL Tech partnered with software major NVIDIA to skill their employees.

In the September 2023 quarter results concall, TCS announced having 100,000-strong GenAI-ready workforce. The company claimed to have as many as 250 Gen AI opportunities in the pipeline.

Although the size of the deals is small at the moment, the tech majors believe gen AI has 'captured the imagination' of clients.

Most of their gen AI projects are proof-of-concept or pilot stages. So, the AI deals are relatively smaller to begin with. They are either half a million or sub US $1 million deals.

But the companies are currently working on a hundred such opportunities. And this could soon move from being a volume game to a high value high margin opportunity.

So, AI is certainly transforming the business models of decades old tech majors in India. And it is a matter of time before they help other non tech companies transform themselves too.

Even then, if investors choose to ignore such stocks citing next quarter's margin dip, they should do so at their own peril.

2024 can very well be the year of return of India's big tech stocks.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)