Indian IT Sector Bottoming Out, 20-30% Index Returns Feasible: Sandip Agarwal

Sandip Agarwal, Fund Manager and Co-founder at Sowilo Investment Managers, has a clear-eyed view on Indian IT: the worst is likely behind the sector, a 20-30% index-level return is achievable in the near term, but anyone expecting a sustained double-digit growth story will be disappointed.

The TCV-revenue disconnect is normal, for now

One of the more confusing signals from the latest earnings season has been the gap between deal wins and actual revenue growth. TCS posted its highest-ever TCV of $12 billion. HCL Technologies and Wipro also reported strong deal pipelines. Yet constant currency revenue growth across the sector remains sluggish or negative in some cases.

Agarwal says this disconnect is nothing new. IT contracts typically run three to five years, so deal wins take time to convert into revenue. More importantly, the last 9 to 12 months have been unusually painful because enterprise clients were stuck in wait-and-watch mode, unsure how much to cut from traditional IT budgets and how much to redirect toward AI. That indecision is now easing.

"With a lot of clarity emerging that AI is a long drawn game," Agarwal noted, clients are resuming more normal decision-making. Stabilising TCV numbers, he said, are always the first sign of a coming revival.

AI is deflationary, but the maths still works

Agarwal is one of the more candid voices on the AI deflation debate. He estimates AI will reduce effort requirements by 20-30% for Indian IT services companies, but spread across four to five years, that translates to roughly 3-4% annual deflation in revenue terms.

Against that headwind, he believes most large IT players can still deliver 6-7% dollar revenue growth, which combined with rupee depreciation and operating efficiencies, translates into 13-14% earnings per share growth annually. Add in consistent buybacks, healthy dividends, and strong corporate governance, and the math supports a 20-30% return at the index level from current prices.

That said, he is firm that this is not a structural compounder. "This is not an industry which will give you double digit growth easily," he said, drawing comparisons to FMCG and utilities — mature, cash-generative businesses that deserve solid but not extravagant valuation multiples.

One clear warning: Avoid ER&D exposure

Agarwal's most pointed near-term advice is to stay away from companies with significant exposure to engineering research and development and product engineering services. While ER&D should theoretically grow at double the industry average over a full cycle, it is currently in a down cycle, and stocks with heavy exposure carry outsized risk.

His recommendation is straightforward: stick to traditional IT services companies with little or no ER&D exposure. He declined to name specific stocks given regulatory constraints on his PMS business, but said the IT index itself is at an attractive level and that investors can identify suitable names from the hints provided.

FY27 should be better than FY26

On Infosys, which was due to report results the following day, Agarwal said the street's base case hope was simply for FY27 guidance to come in slightly better than FY26 performance. He believes FY26 was the cyclical trough for the entire sector, and that most large-cap IT companies — barring perhaps one — can comfortably deliver 6-7% dollar revenue growth in FY27.

The currency tailwind, he acknowledges, has been flattering INR numbers significantly. But even stripping that out, the underlying demand environment is slowly improving. For patient investors, the entry point today looks increasingly reasonable.