Indian equities are under increasing strain as the West Asia conflict collides with growing concerns over artificial intelligence’s impact on the technology sector, according to Sanjeev Prasad, Co-Head of Kotak Institutional Equities. Prasad told ET Now that the timing of the conflict is particularly unfavorable, given that markets were already dealing with stretched valuations and uncertainty about the long-term viability of IT business models.

Oil Supply Disruption Poses Major Threat

Prasad emphasized that while rising crude oil prices are a concern, the more serious risk lies in potential disruptions to physical oil supply. India relies on the Strait of Hormuz for nearly half of its crude imports and a significant share of its liquefied natural gas (LNG) supply. The country holds around two months of finished product inventory, but gas storage is far more limited, with Qatar being the dominant supplier through that corridor.

“This is one thing which we could have definitely done without,” Prasad said. “Given the fact that the Indian market was anyway trading at high valuations to start with, and you had a lot of concerns emerging around the longevity of business models of IT companies, this only adds to the headwinds.”

The government’s policy of imposing a windfall tax on upstream oil producers like ONGC when crude prices exceed $75 per barrel limits the earnings upside for oil producers. Meanwhile, downstream marketing companies face sharply compressed margins if elevated prices persist. Sectors like cement, paints, and other commodity-linked industries could also see margin pressure under sustained high oil prices.

Economic Trends Remain, But Uncertainty Looms

Before the conflict, several positive economic signals were emerging, including credit growth rebounding to 15%, GST rate cuts boosting volumes in the auto and consumer discretionary sectors, and a commodity-driven tailwind for metals and mining. Prasad noted that these trends remain intact in principle, but the new geopolitical uncertainty is “mostly negative” for the earnings outlook.

His base case is that if tensions are resolved within a few weeks, significant earnings downgrades can be avoided. However, a prolonged conflict would necessitate a more serious reassessment of market fundamentals. “If the conflict continues for longer, we will have to reassess the entire earnings outlook,” he added.

AI Disruption Adds Layer of Uncertainty

Separately, Prasad expressed caution about the Indian IT sector, having recently met with nearly 19 companies for investor briefings. He acknowledged that AI tools are delivering clear productivity gains but warned that the deeper question — whether clients will compensate for lower per-project costs by awarding more projects — remains unresolved.

“It is going to be deflationary as far as the cost of programming is concerned,” Prasad said. “How much of that is offset by more work from the same client, we will have to wait and see.”

The market has already responded by compressing valuation multiples for IT services companies, reflecting both near-term earnings uncertainty and growing doubts about medium-term growth trajectories. Prasad suggested this repricing is rational given the level of structural uncertainty involved and warned that analysts across sectors may still not be adequately pricing in the combination of geopolitical risk and technology-driven disruption.

His overall message to investors is to reset expectations, work with wider risk bands, and wait for clarity on the duration of the conflict before making major portfolio moves. “All you can hope for is that this blows over in the next few weeks,” he said, “and life can go back to whatever the new normal is.”