More Sectors Await A Similar ‘AI’ Moment?
FinTech BizNews Service
Mumbai, 27 February 2026: The latest Kotak Institutional Equities - Strategy Note, authored by Sanjeev Prasad, MD & Co-Head, is focused on the recent implosion in the stock prices of domestic IT services companies and global software product companies:
Don’t expect dollars when you deal in quarters
The recent implosion in the stock prices of domestic IT services companies and global software product companies shows the ‘quarterly’ trap that parts of the investment industry may have fallen into. In our view, excessive focus on quarterly results has resulted in a diluted focus on more material factors. One can only hope for a more balanced investment approach in the future.
Implosion in software stocks on AI-led deflation or devastation—lessons learnt?
Domestic IT services and global IT product prices have seen a steep correction in their stock prices (see Exhibits 1-2) on concerns about AI models reducing the relevance of (1) coders and (2) enterprise software. The jury may be out on the implications of the fast-paced developments in the AI industry for several sectors. However, the investment industry must take cognizance of ‘disruption’ threats and price in the risks to the best extent it can through a higher cost of equity or lower multiples. The bulk of the investment community has been loath to price in even ‘known’ risks. As recent events have shown, the ‘unknown’ risks (geopolitical, policy, technological) have increased dramatically.
Both sides of the investment ‘wall’ missed the big picture?
The sharp correction in stock prices of the domestic and global software stocks would suggest that the investment industry was not sufficiently plugged-in (pun intended) into the developments in the AI space. We would attribute this ‘miss’ to excessive focus on quarterly results and low focus on more material factors. As we have written previously, perverse incentives on ‘both’ sides of the investment industry resulted in (1) the distraction of quarterly results taking mindshare from more relevant issues, (2) the hostility to different viewpoints and (3) groupthink, leading to linear thinking and extrapolatory ‘research’.
Companies focused too much on Street reaction to their actions?
The market’s sudden concerns around the longevity of business models of IT services companies, as reflected in a sharp drop in their multiples (see Exhibit 3), show the perils of (1) investors relying on traditional financial and valuation models and (2) companies ‘listening’ overly to minority investors. It seems that the market is overly focused on financial returns and cash flows of companies while deciding on appropriate multiples for stocks and a section of companies is basing investment and strategic decisions on cues from the stock market, leading to under-investment in innovation and R&D.
Could more sectors go through a similar ‘AI’ moment?
The high and inexplicable multiples of many parts of the Indian market (see Exhibits 4-8) would suggest that many other sectors and stocks could have their own ‘AI’ (A-ha!) moments, as and when investors realize that (1) the business models of companies are getting weaker and (2) the multiples do not factor any disruption risks. The odd thing is that it is difficult to justify the multiples of cement and consumer companies based on even the current benign assumptions of growth and profitability, let alone weaker assumptions.
