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Rising investment in artificial intelligence (AI) infrastructure by global technology companies is increasing pressure on their cash flows and balance sheets, creating potential investment opportunities for India's IT services sector, according to a report by brokerage firm Anand Rathi.
The report said that while demand for AI and cloud services remains strong, the growing cost of building infrastructure is raising concerns about whether technology companies can convert their investments into sustainable financial returns. "The AI infrastructure buildout is becoming increasingly capex intensive, amid accelerating underlying demand," the brokerage said. The global technology and AI-related stocks witnessed a sharp correction on Thursday, with investors reassessing the pace and financial sustainability of AI infrastructure investments. The Nasdaq Composite plunged 5.52 per cent on Thursday. The sell-off was driven partly by concerns that gains by Democrats in the US midterm elections could lead to greater scrutiny of data centre projects and slow the pace of AI infrastructure expansion. Investors also questioned whether the massive investments being made by technology companies would generate adequate returns. Against this backdrop, Anand Rathi report highlighted the growing financial commitments of global hyperscalers, with their combined capital expenditure expected to approach USD 730 billion in CY26, representing growth of over 80 per cent year-on-year. Spending is expected to increase further in CY27. Despite the heavy investments, demand for cloud services remains strong. AWS, Azure and Google Cloud grew 39 per cent, 48 per cent and 103 per cent year-on-year, respectively, in Q3CY26, while their aggregate cloud backlog exceeded USD 1.8 trillion. However, the brokerage said strong demand has not yet translated into equally strong cash generation across the sector. Microsoft was the only company among the major hyperscalers to report positive free cash flow in Q3CY26, while its peers remained under pressure. "The risk is not weakening AI demand, but rising financial obligations ahead of proven monetisation, making funding discipline and returns on invested capital increasingly critical," the report said. The brokerage believes this could encourage investors to shift towards asset-light businesses with stronger free cash flow generation, including Indian IT services companies. It said the top six Indian IT companies are currently trading at 16 times and 15 times their estimated FY28 and FY29 earnings, respectively, compared with their 15-year average one-year forward price-to-earnings multiple of 17.9 times. The report also highlighted that capital-light IT services companies could benefit from wider AI adoption as businesses increasingly seek technology-led transformation. However, growth in the services sector remains in the low single digits, while AI-led pricing pressure and reinvestment requirements could constrain margins. The brokerage said it favours diversified IT companies with strong cash conversion and AI capabilities, adding that shareholder returns could provide downside support as AI monetisation expands. "Capital will rotate into asset-light FCF compounders," the report said, highlighting the potential appeal of Indian IT companies amid rising global AI infrastructure costs. (ANI)
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