“From April, I am saying that the IT sector is massively undervalued, and it will recover in a big way once enterprise AI opens up. Whatever the (Anthropic) CEO has said, it clearly reflects that more money needs to be focused now on selling and opening up enterprise AI. It is a very positive development for Indian IT, and not only Indian IT, but global IT consulting side and services side,” Agarwal said in a conversation with CNBC-TV18 on September 15.
The increasing pressure to rein in the surge in AI capabilities led to a stellar rally in Indian IT stocks on Tuesday. The combined market value of all the stocks in the Nifty IT index surged by over 1.2 lakh crore in the opening minutes of trade.
Before the latest turn in sentiment, investors feared a sharp deflation in the pricing power of Indian IT companies as AI-coded software increasingly ate into their business. In a report released last week, CLSA pegged the pricing deflation for Indian IT companies at 10-15% on average, and 30-40% in some cases.
Another factor fuelling the wave in favour of the likes of Tata Consultancy Services (TCS), Infosys, and HCLTech is the analysis of the latest frontier models released by Anthropic, OpenAI, Google and Meta. The improvements in software-related tasks were incremental and cheaper, and the capability gap between the models had narrowed, providing a favourable ground for AI adoption by enterprises, which would open up new business opportunities for Indian IT services, a report from Kotak Institutional Equities highlighted on Sep 8.
Agarwal believes the cumulative earnings per share (EPS) may grow 45% to 70% over the next three years. Even if valuation multiples remain unchanged, that kind of earnings growth could support annualised returns of around 13% to 14% for large IT stocks and at least 20% for mid- and small-cap companies, he concluded.
For full interview, watch accompanying video
