Navigating India's Deep Tech Frontier: Opportunities and Risks for the Savvy Investor

In August 2023, India's space mission Chandrayaan-3 made history by successfully landing on the moon, a remarkable achievement by the Indian Space Research Organisation (ISRO). Beyond the scientific milestone, this event signaled a new era for India's technological landscape, showcasing the country's growing prowess in innovation and its commitment to advancing technologies that have the potential to transform lives.

India has emerged as a leader in people-centered innovation over recent years. The success stories of platforms like Unified Payments Interface (UPI) and Aadhaar are prime examples of how India has democratized technology, making it accessible to millions who were previously excluded. These advancements have laid the groundwork for India's indigenous tech sector, which is now poised at an inflection point, particularly with the rise of artificial intelligence (AI) and large language models (LLMs).

The Impact of AI on India's Technological Future

The advancements in AI are set to revolutionize how we work and live, potentially leading to a paradigm shift in computing that could rival the impact of the personal computer, the internet, and smartphones. Among the most significant developments is the concept of Sovereign AI, which refers to a nation's ability to develop and control its AI capabilities using its own infrastructure, data, workforce, and business networks.

Nvidia's CEO, Jensen Huang, has emphasized the importance of every country developing its AI infrastructure to harness its economic potential while safeguarding its cultural identity. Recognizing this, the Indian government has approved a substantial funding package of Rs 103 billion (approximately US$ 1.2 billion) to strengthen the country's AI infrastructure. A key component of this initiative is the creation of a supercomputer equipped with at least 10,000 GPUs, which could pave the way for India to develop homegrown solutions such as app stores, mapping services, search engines, spacetech, and cloud storage systems.

Despite being at an early stage compared to leading deep tech hubs globally, India's deep tech sector is on the cusp of exponential growth, driven by visionary policy initiatives, untapped market opportunities, and a wealth of world-class talent. Over the past few decades, India has established itself as a global leader in IT services outsourcing, with companies like Tata Consultancy Services (TCS), Infosys, and Wipro spearheading this success by offering cost-effective software development, testing, and business process management services to enterprises worldwide.

India's IT services industry now contributes nearly 8% to the nation's GDP, positioning the country for the next phase of technological leadership—leading innovation in the global deep tech arena. Just as Indian IT services firms localized software development and disrupted the Western-dominated landscape, Indian deep tech startups have the opportunity to pioneer the fourth wave of innovation by creating solutions that leverage cutting-edge technologies such as AI and LLMs.

Is Another Tech Bubble on the Horizon?

As global investors scrutinize the tech sector, concerns are growing about the possibility of another dot-com bubble, particularly in the US. For instance, the diversity among the top 10 most valuable companies in the US is less pronounced in 2024 compared to the peak of the dot-com bubble in 2000. While six sectors were represented among the top 10 companies in 2000, only four sectors are represented today, with tech giants dominating the market capitalization in both periods.

In India, however, despite the setbacks experienced by a few tech startup IPOs, such as Paytm, Nykaa, and Policybazaar, which saw their valuations plummet post-listing, the overall valuations of the tech sector have remained relatively reasonable. Consequently, speculating on the emergence of a tech bubble in India seems premature at this stage.

Investing in AI and Deep Tech: Proceed with Caution

As the buzz around AI and deep tech continues to grow, investors must exercise caution when evaluating companies that capitalize on these buzzwords without delivering tangible shareholder value. A case in point is ideaForge Technology, a drone and unmanned aerial vehicle manufacturer that had a spectacular public listing in 2023, becoming the first IPO to be subscribed 100 times since 2021. However, the company's stock price has since declined by a third due to weak quarterly earnings and profit-taking, despite a steady order book and strong demand for drones from the government.

According to Nasscom, India is home to over 3,000 deep tech startups, growing at an impressive rate of over 53% annually over the past decade. These startups now represent a 12% share of the Indian startup ecosystem, with a third of them operating in the enterprise tech and banking, financial services, and insurance (BFSI) sectors. India also has its own policy framework for the deep tech ecosystem, which, though still in its early stages, is witnessing rapid growth. These startups are leveraging advanced technologies, including AI, machine learning (ML), the Internet of Things (IoT), blockchain, Big Data, and robotics.

As more of these startups prepare to go public in the coming years, investors must evaluate their stocks not only based on profitability but also on the sustainability of their valuations. Howard Marks, in his recent memo, aptly quoted Mark Twain's observation that "history doesn't repeat itself, but it often rhymes." For investors, this is a timely reminder that market cycles, along with their causes and effects, often exhibit patterns that echo from one period to the next.

In conclusion, India's deep tech sector is at a critical juncture, with the potential to drive the country's next wave of technological leadership on the global stage. However, as the sector continues to evolve, investors must remain vigilant, balancing the excitement of new opportunities with a cautious approach to valuation. By doing so, they can navigate the complexities of the market and capitalize on the long-term growth potential of India's burgeoning deep tech ecosystem.