Sharp acceleration in disruptive forces likely across sectors, including two-wheelers, IT services
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A sharp acceleration in disruptive forces is expected in the near term across sectors such as two-wheelers, commodity chemicals and IT services.
Consumer-facing businesses are likely to face gradual challenges to their business models in the medium term, Kotak Institutional Equities said in a report.
The market has largely remained oblivious to such risks, enamored by short-term factors of higher profitability (automobiles) or likely recovery in revenues (IT services), the report said.
The deterioration in the market structure of the paints market, with the entry of Grasim and more aggressive competition from JSW Paints, may result in lower growth and profitability and return ratios of the incumbents, which are at very high levels currently, the report said.
The high multiples of incumbents suggest that the market is still ambivalent about the disruption threat although multiples have declined over the past 2-3 years. Paint companies’ stocks have been largely flat for the past 2-3 years.
Electric two-wheelers have seen strong traction and have 13 per cent market share of the domestic scooter.
EV two-wheelers have hitherto competed in the ‘premium’ segment, but they will compete more aggressively in the mainstay mass segment in the near term, with the launch of lower-priced products due to declining battery costs.
The increased competitive intensity across segments in the two-wheelers market will not bode well for the high profitability and returns of incumbents, the report said.
Also, AI will transform the Indian IT services industry and the impact is not yet factored in, the report said.
The recent progress made by a number of LLMs, coupled with (1) increasing use-cases and (2) massive computing power, suggests that the entire IT industry may be at the cusp of an AI-led transformation. However, the strong correlation between Indian IT companies and the Nasdaq is at odds with the current state of Indian companies’ AI adoption.
“In our view, client budgets may not change materially, but AI projects will see higher allocation. A number of service lines will see disruption risks, even as medium-term opportunities may rise from system integration. The relative velocity of application and disruption will determine the quantum of opportunity and risk for Indian companies," the report said.
