Anand Shah, CIO of PMS & AIF at ICICI Prudential AMC, sees cracks emerging in the artificial intelligence investment boom as revenue generation fails to keep pace with spending on infrastructure. He believes the sustainability of the massive investment cycle will depend on how effectively AI companies convert spending into revenue.“Today, the boom is in AI investment.
We are not seeing a big boom in terms of revenue,” Shah told CNBC-TV18 in an interview. He pointed to pressure on companies supplying AI infrastructure, including chip manufacturers and businesses benefiting from electrification, alongside revenue concerns among AI companies.
Shah said the emerging weakness challenged the broader narrative that a massive AI build-out would eventually disrupt and wipe out several other industries. Anand Shah starts adding to IT stocks after prolonged underweight positionDespite concerns about AI disruption, Shah sees a potential opportunity for Indian IT services companies as businesses move towards integrating AI into their operations.
ICICI Prudential AMC has started increasing its exposure to IT stocks after remaining underweight for a prolonged period, although the fund house will remain marginally underweight for now.“The next leg is when we will gain the confidence to increase our weightages,” Shah said.
He said IT companies had been cutting prices and passing on a significant part of the benefits from AI to customers while still managing their top line. As companies seek to integrate AI into their systems, IT services providers could benefit from the implementation work.
Greater confidence in the sector's performance could prompt the fund house to increase its allocation further. Why ICICI Prudential AMC prefers manufacturing stocksShah said ICICI Prudential AMC remained overweight on manufacturing across large-, mid- and small-cap stocks, pointing to improving earnings and a changing competitive environment for Indian businesses competing with China.
He said Indian manufacturers had faced pressure from Chinese competition for 15-20 years, but the situation was changing at the margin. Reduced competition in some areas, safeguard and customs duties, and other benefits were supporting domestic businesses.
Measures in China to curb excessive competition had also contributed to price increases in sectors such as chemicals. Metals offered another indication of the opportunity, with earnings growth of more than 30% over the previous few quarters, according to Shah.
He also highlighted strong cash-flow generation, while cautioning that metal stocks remained inherently cyclical and volatile. Indian metal companies could benefit from having costs in rupees and revenues linked to the dollar, alongside access to resources such as iron ore, bauxite and coal.
Shah added that rupee depreciation against the Chinese yuan had created a tailwind for Indian manufacturers competing with China, while making Chinese goods and raw materials more expensive for Indian buyers. Consumer companies face rising costs and tougher competitionIn contrast to manufacturing, Shah said consumer-facing businesses were dealing with higher input costs and intensifying competition, making it harder for companies to protect profitability.
He pointed to the paint industry, where the number of major players had increased from four to seven or eight. Competition was also rising in consumer staples, with funded start-ups entering the market and some being acquired by large fast-moving consumer goods companies.
Shah said this fragmentation on the consumer side contrasted with greater consolidation or protection in parts of manufacturing. Shah remains positive on telecom as pricing potential growsShah was constructive on Indian telecom, citing low average revenue per user , industry consolidation and the potential for higher tariffs.
Despite India being one of the world's largest consumers of data, pricing remained low, even as the number of competitors had fallen significantly since 2016.“Telecom in India is a business with a strong moat,” Shah said, adding that the sector had significant potential given the size of the market and the low starting point for pricing.
He also sees scope for companies to monetise their existing 5G investments as more use cases emerge. The transition from 4G to 5G has been slower than the earlier shift from 3G to 4G because fewer immediate use cases have developed, he said. Shah expects the resulting revenue growth to create operating leverage, with additional capital expenditure and expenses remaining relatively limited compared with the opportunity.
India needs foreign investment until exports strengthenOn equity taxation, Shah said India needed to remain mindful of its dependence on foreign investment flows to fund its deficit. He argued that the country would continue to need foreign direct investment and foreign institutional investor flows unless exports increased significantly relative to imports.
Shah also noted that the securities transaction tax had become a source of revenue for the government, while saying the future direction of equity taxation remained uncertain.“We need to be mindful that, unlike many other economies that run surpluses, exporting more than they consume or producing more than they consume, India is much more dependent on foreign flows,” he said.
He added that attracting foreign investment would remain important until India built sufficient manufacturing strength to export substantially more than it does today.