Infosys derating: Indian fund managers treating IT stocks as reverse AI trade, says GREED & fear

Jefferies' Christopher Wood in his latest GREED & fear note said Indian fund managers are treating the IT service stocks the same way foreign fund managers are treating India, namely as the reverse AI trade. He said the best top down structural story in India is energy. 

Citing domestic funds' preference, Wood noted that Infosys has de-rated significantly and currently trades at 13 times one-year forward earnings, with a 5 per cent dividend yield.

In the most recent earnings season, the ten biggest quoted IT services companies actually reported adding 6,200 jobs. If this is not a big number, it is better than an outright decline, Jefferies' Wood wrote.

"More days in India convinces GREED & fear that the best structural growth story top down remains energy in terms of the private sector build out of electrification via the expansion of renewable energy, primarily in the form of solar," the GREED & fear note suggested.

Wood noted that China has led the way here with the economies of scale created by its grid build out and the related advances in battery storage technology. 

"This means there is a clear template for India to follow though it is a grey area to GREED & fear how much India will be able to benefit from China’s battery storage technology. Bloomberg reported in May that Reliance was in talks with Chinese battery manufacturer CATL to procure parts for battery energy storage systems (BESS). Still GREED & fear hears Reliance has not succeeded in procuring technology from CATL or other Chinese battery makers," Wood said in the Greed & fear note. 

Wood said Indian battery makers Exide, Amara Raja and Waaree Energies Ltd have reportedly secured Chinese battery technology. While Energy In Motion (EIM), an associate company of Ravindra Energy, has partnered with CATL. 

Meanwhile, Jefferies said a presentation made by Hitachi Energy India at Jefferies India Forum this week generated a lot of attention. 

The company’s CEO, Venu Nuguri, projected total final energy demand to increase by 50 per cent and electricity demand by 100 per cent to 3,365 TWh by 2035. As a result, the share of electricity in total final energy demand is expected to rise from 19 per cent in 2023 to 25 per cent in 2035 on the back of a surge in renewables and improved “storage and smart demand management”.  

"Hitachi Energy, given its expertise in transmission, is a picks and shovels play on this theme. That is understood by the market given that it is trading at 71x 12-month forward earnings having rallied by 68 per cent year to date. Still at a time when India has been out of favour on the reverse AI perception, it is worth reminding non-specialists that India continues to enjoy its own structural growth story which will prove resilient at a time when the current near all-consuming focus on AI diminishes," the note suggested.