Concerns Grow Over AI Stock Valuations in India Amid Global Sell-Off

The artificial intelligence (AI) sector, which has driven stock market growth in recent months, is showing signs of strain as investors reassess valuations. Analysts are increasingly concerned that the surge in AI-related stock prices may have outpaced fundamental economic indicators. Prominent financial leaders from Morgan Stanley and Goldman Sachs have warned that equity markets could experience a significant downturn, highlighting fears surrounding inflated technology valuations.

Recent market activity reflects this caution, with a notable sell-off in global tech stocks earlier this week, primarily affecting companies such as Nvidia and Palantir Technologies. The declines prompted the S&P 500 and Nasdaq Composite to register their largest single-day drops in almost a month. Nvidia, which recently achieved a market capitalisation exceeding $5 trillion, has seen its shares drop approximately 5% in the past week.

According to a report by Kotak Equities, discussions regarding a potential AI bubble are intensifying. The brokerage stated, "Most observers agree about a bubble, but there is no consensus on the duration, magnitude, or even the nature of the bubble."

Impact on Indian Markets

While India's stock market does not currently feature a dominant AI player, investors have been actively seeking exposure through companies associated with the broader digital ecosystem. This approach has resulted in increased volatility for many of these stocks. Vinit Bolinjkar, Head of Research at Ventura Securities, remarked that the recent market correction is largely attributed to global profit-taking rather than any inherent weaknesses in the Indian market.

However, concerns about valuations have begun to affect Indian firms with AI connections. Netweb Technologies, which develops high-performance computing systems for AI applications, has been particularly hard hit. The company's stock has plummeted by 18% over the past five days, suffering a nearly 10% drop in a single day. Previously, it had surged by 110% during the first half of 2025.

Other companies, including Anant Raj, which operates data centres, have also faced declines. Anant Raj's shares have fallen 5% in the same period, despite a previous 40% increase over the last six months as investors anticipated growth from India's data infrastructure expansion due to AI adoption. Prashanth Tapse, Senior Vice President of Research at Mehta Equities, noted, "The market had already priced in substantial growth and profitability ahead of visible delivery. When any part of that future narrative is questioned, these stocks face sharp corrections."

Additional companies experiencing declines include E2E Networks (down 2%), Techno Electric (down 6%), Orient Technologies (down 10%), and Affle (India) (down 8%). Despite this downturn, the Indian equity market's limited exposure to AI-related companies has helped prevent a broader market crash, according to Vipul Bhowar, Senior Director and Head of Equities at Waterfield Advisors.

Valuation Concerns

The primary issue at hand is that many Indian AI proxy companies are trading at significantly elevated valuations following a recent surge in stock prices. For example, Netweb Technologies is currently trading at a price-to-earnings ratio of 138 times, while E2E Networks stands at 177 times. Anant Raj has a price-to-earnings ratio of 49 times, well above the industry median.

Analysts assert that the recent downturn is largely a reflection of valuation fatigue following a remarkable run-up in stock prices. Investors have flocked to companies linked to AI, such as those involved in cloud computing, semiconductor production, and data storage, causing stock prices to skyrocket beyond their underlying fundamentals.

Prashanth Tapse highlighted that while investors are drawn to these proxy plays for their long-term growth potential in the AI sector, any uncertainty regarding future timelines or rising competition can lead to significant sell-offs. He cautioned that the current sell-off is a reality check, indicating that growth may take longer to manifest, profit margins could shrink, and competition in AI infrastructure is escalating.

For those convinced of the long-term value of AI and data centre investments, Tapse suggested that the current correction may present an opportunity. He emphasised the importance of timing and a staggered investment approach rather than committing all capital at once.

Vishnu Kant Upadhyay, Assistant Vice President of Research at Master Capital Services, characterised the recent pullback as a "sentiment reset" rather than a structural reversal. He pointed out that while valuations had become detached from fundamentals, the technology-driven themes in India are still in their nascent stages.

Upadhyay also speculated that this trend could lead to a shift in investment focus, with capital moving from high-priced new-age sectors to more reasonably valued areas such as financial services, capital goods, and manufacturing. Although companies like Netweb and Anant Raj may remain volatile in the short term, Upadhyay believes they will still offer long-term investment opportunities once valuations stabilise.

Future of AI Investments

Despite the recent corrections, analysts agree that the overall trend towards AI remains intact. With India continuing to invest heavily in digital infrastructure, data centres, and automation, the potential for growth in the AI ecosystem appears promising. Vinit Bolinjkar reiterated this point, stating, "This may increase short-term risk aversion but the long-term trend remains favourable."

Investors are advised to remain patient and consider the broader implications of the evolving AI landscape. As the sector matures, opportunities for investment may arise, particularly as global investors reevaluate their strategies and seek alternatives to the crowded AI market.