2 important stocks in India’s AI journey worth researching?

0:05 Everyone is talking about the AI revolution. But the real question is who are the real enablers of this revolution in India ? Because AI is not just limited to language models or chatbots. To run it, it requires massive cloud infrastructure, compute power and enterprise sessions. And this is the role that some Indian companies are playing behind the scenes. [Music] The AI revolution is no longer just talk but has become a reality and India is poised to become a global leader in this transformation. According to the Sikkim and BCG report, India's AI market is

0:51 estimated to reach $17 billion by 2027. Which is growing at an annual growth rate of 25 to 35%. And 92% of knowledge workers in India are using AI, which is much higher than the global average of 75%. India's data center capacity has crossed 1 gigawatt by 2024 and is estimated to reach 17 gigawatts by 2030. But every taken company will necessarily become a future multibagger. This is not necessary. So let us look at those companies which can bring business growth through AI bone. Our first company is Emphasis Limited. Mfsis is a global IT sessions provider specializing in cloud and AI-based services. The company's

1:36 focus is to help businesses transform with next chain technology. If we look at the verticals, the company's major revenue comes from application services with around 72% share, where they create customized software for the customers along with maintaining and enhancing it. Second is BPO Services whose share is 16%. This includes customer service, transaction, processing and compliance related work. And last comes infrastructure services. The contribution is 12%. This segment offers end-to-end mobility services such as workplace management and data center services. Geography wise, North America is the company's largest market. 81% of the revenue comes from there.

2:23 India's contribution is only 5%. Talking about client profile, 50% revenue comes from banking and financial services followed by technology, media and telecom and of course insurance. Before the financials, let’s talk about their AI led strategy. Only 25% of the deal pipeline in the quarter for FY24 was AI-led. By the end of financial year 25, this has increased to 65%. 59% of total contract value in the same quarter was AI driven. The company's AI road map is split into these four phases. Now let's jump to numbers. In financial year 25, the company's revenue increased by 7.2% to reach Rs 14230 CR. Mainly AI led deals and large multi year contracts especially

3:11 from the ramp up of BFS & TMT. Direct channel revenue also grew by 7.1%. What is the most interesting point? Employee cost grew by just 2.7% and its contribution to total sales declined from 59.7% to 57.2%. Major relief for an IT company. The management says that in big transformation deals the company initially takes higher head count. But as automation kits in offsolding increase, sub- contract staff is used for transitions. Hiring is also taking place on a 90 day rolling basis. This means that the company is onboarding people only as per the requirement. And avoiding making permanent benches

3:57 to stay lean and cost efficient. Result Operating profit increased by 9.3% to Rs 2647 Cr and OPM also improved to 18.6%. Gain of 40 bps and its direct impact was seen on the bottom line. Net profit increased by 9.5% to Rs 172 Cr. Now let's look at the growth outlook. The company has guided for EBIT margin of up to 15.75% for FY26 from the current rate of 15.2% and TCUV reaching around Rs 11,000 crore for full FY25. Which is approximately 73% of the overall revenue. Total deal pipeline grew 86% year-on-year. The

4:44 large deal pipeline has increased by 154% year on year. Client expansion has also been seen from 40 to 160 CR i.e. new mid-range clients were onboarded. Plus, through its proprietary platforms such as mfas.ai and Deep Ina Insights, the company is helping clients reduce cost to serve and improve decision making. Now if we look into balance sheet, company's cash to assets ratio increased from 5.8% to 10.9% in financial year 25. Because cash reserves doubled from Rs 84 cr to Rs 1663 cr. But here's the catch. Pressure is visible in receivables. The company

5:31 's unbilled receivables grew by 40% to Rs 186 cr. Which has now become 64% of the total trade receivables. It may not be negative but sustained high unbilled amount should be watched. Because these affect cash flow. Plus old receivables are also increasing. Receivables that were one to two years old and three-plus years old moved up sharply. Expected credit loss also increased by 31% to Rs 219 crore. This means that the company is taking potential defaults seriously. The company is currently trading at a PE of 31. Compare to its median PE of 29. Now if we look at the risks, the first is that 82% of the company's revenue comes from the US. And 54% of revenue comes from the top 10 clients. Both of these

6:17 factors represent a moderate concentration risk. Direct verticals like logistics and manufacturing are the first to be impacted by the pandemic and this is why this segment is witnessing a continuous decline. Lastly due to tariff uncertainties and global trade destructions. Especially when the PBT contribution of this segment is the second highest. Plus such a sharp increase in receivables directly impacts the cash generation ability of the company and can pose a major risk to cash flows. Especially if this trend continues. Now let us come to Net Web Technologies India. Net Web Technologies India which was incorporated in 1999. Today it is one of India's leading high-end computing solution

7:02 providers. The company's work is not limited to manufacturing only. It offers full step capabilities from design development, implementation and integration. It is a rare Indian player which develops end to end high performance computing i.e. HPC sessions. Including home grown compute storage and even super computing infrastructure. What is the edge of the company? The network starts working with customers from the solution design stage even before an RFP is received, resulting in a win rate of up to 60%. The business of this company is divided into six major verticals. The first is Private Cloud and Hyper Converged Infrastructure i.e. HCI where cloud tools and network

7:48 interfaces are provided. This is their largest revenue driver with a 37% share. Then we have High Performance Computing i.e. HPC. Here the network deploys supercomputing systems. Specially for AI research and simulations. 36% of the total revenue comes from here. Next is AI systems and enterprise workstations. Customized sessions are offered for applications such as ML and LLM through in-house platforms like Qubits and skysai. The revenue contribution here is around 15%. The remaining money comes from High Performance Storage i.e. HPS Data Center Services & Software and Services. The client mix is 50-50 with government clients and private sector. Clients include higher education

8:35 institutes, research centres, defence and space organisations. And most importantly, Netwerb is one of the very few global OEM partners of NVIDIA that designs and develops custom products for them. Now let's analyze the financial performance. The company's revenue jumped 58% in FY 25 and major credit for this goes to Private Cloud & HCI and HPC verticals. These two verticals showed growth of around 52% and 54%. Largely driven by large institutional deals and 81.4% repeat order base which highlights the company's solution quality and client trust. This is a signal of expanding demand for sovereign digital infrastructure.

9:23 But expenses also increased by 59.3%. Cost of materials alone jumped 61.8%. Which shows that the prices of semiconductors, storage devices and hardware components have gone up rapidly. This had a direct impact on margins as efficiency came under pressure. Operating profit grew by 55.3% but OPM contracted slightly from 14.2% to 13.9%. Dip of 30 bps. On the other hand, depreciation spiked by 83% to Rs 11 CR. Possibly due to new asset additions and the same growth will translate to the bottom line. Net profit increased by 50% to Rs 114 crore. It is important to note that

10:10 due to the company's strong repeat clients and full-stack in-house integration, its margins are much better than its MLC competitors. Management on s. Deep domain expertise also makes this edge stronger. Now let's see what their growth outlook is. The company is confident that it will be able to sustain 35 to 40% top line CAGR in the next few years. Based on strong order pipeline, healthy order book and overall momentum, an integrated full-stack player like Netv currently has no direct competitor. India's AI market is growing at a CAGR of 25 to 35% and is estimated to reach $17 billion by 2027. Also, according to Care Edge, India's data center capacity may double in the next 3 years. Which will

10:57 further fuel AI and cloud infrastructure. For FY26, management has given guidance of 13 to 14% EBITDA margin and 10% PAT margin. That means it has to be maintained almost as much as it is now. The revenue contribution of the AI segment is expected to increase from 15% to around 20%. Order book has reached Rs 350 cr by Quarter Four of FY 25. Whose execution cycle is 8 to 12 weeks. And the order pipeline is around Rs 4,000 crore. In which historically 60% conversion has been seen. This pipeline is approximately 3.5X overall revenue. Also note that the India AI Mission project is not included in the pipeline yet. In which for context government has allocated around ₹000 crore

11:45 for 202526 plus in financial year 25 the company has allocated Skylus. I did it. A unified session that can be setup with GPU based AI infrastructure on the go. And with no competition in India, we offer global MAC or functionality through multiple tools and licenses. Whereas skisai is a single unified product. It is currently in the adoption phase. But in future AI could become a key driver of growth. International expansion is also underway. The company is setting up a service network in four countries in Europe and the Middle East. And if we look at market trends, segments like Private Cloud and Cloud Management are forecast at 19% and 23% CAGR by

12:33 2029 which contribute approximately 40% of the company's total revenue. Moreover, AI spending in India is expected to grow at a CAGR of 31.5% over the next four years, according to the management. If we look at the balance sheet, Investments, Inventories and Trade Receivables have grown rapidly at around 113% and 54% CAGR in the last two years which is definitely in line with 60% sales growth. But with this fast growth the inventory cycle has become a bit stretched. Which had an impact on inventory rates which increased from 77 to 92. And receivable days increased from 93 to 155. However, the company has managed the cash conversion cycle by increasing its debt payables. But

13:20 on the other hand cash flow from operations fell from Rs 18 CR to negative Rs 13 CR. This means that the company is not able to generate cash in comparison to net profit. The CFO by net profit ratio has fallen to negative 11% and the major reason for this is the rapid increase in receivables and inventory levels which is putting pressure on the CFO. Yes, overall cash flow remained positive but largely due to investment sell off of Rs 112 cr. But due to the company's working capital intensive model, it is important to keep an eye on the inventory and receivable cycle. Otherwise, cash generation may come under pressure. Now there are certain risks. The first is revenue concentration.

14:07 Revenue contribution from top 10 clients reached 66% in FY25. Whereas in financial year 22 it was 49.5%. Top five clients alone contribute 51% which shows high dependency on a few clients. The second major risk is working capital intensity. Gross current assets increased to 210 days in FY 25. versus 168 days in FY 24. Because 30 to 40% revenue comes in quarter four and payments are received in 70 to 90 days. Plus due to import of raw materials the company has to maintain high inventory. Yes, this needs to be monitored closely. So now the question is not whether AI is the future or not? Everybody knows that. The question is which businesses will be able to

14:52 create value sustainably in this future. Which company's approach did you find more grounded and scalable? Please do tell us in the comments. And if you find the video valuable then share it. Subscribe to the channel. See you in the next video. Till then invest smart and stay futuristic. See you in the next one. Bye bye. Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. Please read the risk exclusion documents carefully before investing in equity shares, derivatives, mutual funds and other instruments traded on the stock exchanges.