There is FOMO in India’s financial markets, driven by companies advancing artificial intelligence. The market is focused on AI products and hardware: the most valuable company in the US is Nvidia; in Europe, the Netherlands’ semiconductor equipment maker ASML; and in Asia Pacific, Taiwan’s TSMC. That sums up the mood, which is less interested in the secular profit-growth story India stood for over two decades.
India’s rising household savings are, for now, giving a cushion against downside in stock prices. The unrelenting selloff by foreigners is not essentially because things have gone worse in India. Foreign portfolio investors are chasing faster profit growth elsewhere. However, Indian shares still have to wrest back their earnings-growth story to stay in contention for investor money. Although India was not an important player in the early excitement around AI and related stories, it is certain that India will be a significant user of AI and related technologies, and Indian companies will eventually profit from consistently adopting the efficiencies these technologies deliver.
A secular 10-15% profit growth is possible with rapid adoption of AI across business processes. The most nimble adopters are sectors such as IT services and banking, financial services and insurance (BFSI). A reading of quarterly conference call transcripts gives a peek into how businesses are adopting and adapting AI to expand margins.
There is hope in the midst of all the gloom and doom about India. The stories below show companies using AI and related technologies to boost output, optimise costs and expand margins.
For example, in the banking sector, there is a visible reduction in the cost of risk. ICICI Bank announced in the latest quarterly filings a net non-performing assets ratio of 0.33%, the lowest in years. It reportedly said that a significant amount of credit scoring is AI-based, which has induced efficiencies. So while AI may not yet be a new revenue stream, the cost of risk is trending down.
In the manufacturing sector, physical AI is reducing plant operating costs, boosting margins. Companies like Tata Steel can increase output without adding any further physical assets. Energy accounts for nearly a third of manufacturing costs, so even a small energy-saving measure can increase operating profit. Companies like Tata Steel are likely to benefit from the use of AI and from optimal energy use.
Another example is Reliance Industries’ refining business, where a 0.5% yield shift can translate into significant profits. AI models analyse live data on temperature, pressure, and crude quality to optimise the refining process. They help produce the right mix of crude grades imported to make high-margin fuel, such as aviation turbine fuel, rather than low-margin products like kerosene or diesel. They also predict equipment failure well in advance. An unplanned shutdown can cost anywhere from Rs 50 crore to Rs 100 crore, so avoiding such an event could boost profit margins. Reliance Industries operates the Jamnagar complex in Gujarat, the world’s largest single-site refining hub, with a capacity of 1.24 million barrels per day.
Another example from the manufacturing sector is Asian Paints, the largest paints company. It has a large distribution scale, and the company uses AI to predict demand at the pin code level. That allows them to manage output every day and reduce inventory. By producing need-based products, the company can make multiple inventory turns, meaning it replenishes stock more often per day. Over the past several years, the company has reduced distribution costs to 3% of sales from 30-40%.
If you are a regular investor in large-cap companies directly or indirectly, you may want to continue doing so. It may be a good idea to speak with a knowledgeable professional to identify the right companies or funds to invest in, especially as AI reshapes earnings growth stories.
