Indian IT remains a great space to invest in: Saurabh Mukherjea

"On IT services, there is a raging debate some people say that Indian IT services will be adversely affected. Our view is slightly more positive. We think elements of IT services, testing, testing of software for instance, will get increasingly automated," says Saurabh Mukherjea, Founder, Marcellus Investment Managers.

Just wanted to get in your take on this big tech revolution in the form of AI being a huge disruptor. As to what it would mean for individual companies, is there also, to a certain extent for tech companies that fear of replacing jobs or roles?
We are not experts on generative AI but from what we are hearing from the two big sectors where the impact I think will come the earliest; first off, financial services, it is clear that lenders’ in our country will use generative AI in their credit assessment processes, perhaps even for customer servicing.

So in the case of lenders, my reckoning is AI will help them do more with less expenditure on head count, allow them to provide better services, better credit underwriting at lower expenditure and I think therefore, for lenders in our country, it is a positive.


On IT services, there is a raging debate some people say that Indian IT services will be adversely affected. Our view is slightly more positive. We think elements of IT services, testing, testing of software for instance, will get increasingly automated.

AI will play a role there. And secondly, as the Fortune 500 companies all of them make a rush towards AI and generative AI. I think the impetus to move towards cloud, the impetus for all of these companies to move towards cloud becomes even greater.

As I think Accenture has said, only 30% of the world's large companies have done their cloud migration, 70% are yet to do so.

Our reading is AI hastens the trend towards cloud and that can only mean one thing for Indian IT services which is more work, more business, which is why we are a little sceptical of this current bout of gloom and doom about Indian IT. We reckon Indian IT remains a great space to invest in.

Indian IT companies are dependent on the BFSI space, the banks, the insurance companies to generate revenue that is where there seems to be an imminent slowdown. So if the US economy slows down more and if some of the banks and other insurance companies and manufacturing companies, they start reducing their outsourcing activity. Do not you think that for next two or three years, the sector per se could go through low growth?
You nailed it very nicely there. NVIDIA is the hardware, the chips behind AI. We are investing in that in our global portfolio. TCS is the kind of the foot soldiers, the OPEX. TCS is the OPEX that will deliver AI to the world's largest companies. We are investing in that in our Indian portfolio in Consistent Compounders and that is why again, I stress again, right an Indo-American portfolio, a double engine portfolio, where you play a trend like AI through hardware in the global portfolio and the software piece you play through the local portfolio so that is the structural theme.

Now let us focus on the here and the now. Yes, America is going through a slowdown. It is relatively clear that IT services companies in America have throttled off, they have throttled off their near-term IT services. But I have never understood how anybody can make money by looking at short-term trends. In any DCF valuation of large companies like Infosys or TCS, the one year-two year numbers are irrelevant. What drives valuation is the next five years, 10 years, 15 years, 20 years. And on that count, AI only increases the amount of work Indian IT services will get. AI increases the need for cloud. And therefore, I think AI increases the need for Indian IT services companies. It is a bull trend. It is not a bear trend. We need to overlook the short-term noise, focus on the long-term signal.

I have the public holding of your three big portfolios, Rising Giant, Little Champs and Consistent Compounder. Any marquee changes you have done in any of your portfolios in last six weeks?
In the Little Champs portfolio over the last couple of months, we bought Metropolis. So in Consistent Compounders and in Rising Giants we have Dr Lal Path Labs, it remains an investment that we feel very bullish about. We doubled our investments around 12-13 months ago in Dr Lal Path Labs. But looking at how Metropolis has emerged from COVID, and looking at their dominance in Mumbai and how they strengthened the franchise coming out of COVID, we felt that Metropolis deserves a place in the Little Champs portfolio.

So that has been the main addition in the last couple of months. I think much like Dr Lal, Metropolis's valuations have actually fallen even more in the aftermath of COVID and we felt that combination of a great franchise in the Mumbai and Maharashtra region, combined with strong cash flows, impeccable balance sheet made Metropolis a very tasty investment.

Metropolis, you own Dr Path Labs, you are really bullish on diagnostics.
Dr Lal Path Labs we own in the CCP and in Rising Giants, the large and midcap portfolios. Metropolis, we own in the small cap portfolio. Yes, we are bullish on diagnostics. It is an essential product. It is an industry where there is rapid consolidation; the venture capital funded forays are falling by the wayside, the handful of cash generative, well managed franchises are going to consolidate the market.

It is a $10 billion market, only $2.5 billion is in the hands of the organised sector. $7.5 billion is in the hands of Mom and Pop Path Labs. And I think the consolidation will take place over the next decade or so. And we want to be there and make money from it.