IT stocks could hit new all-time highs in 6–12 months, says Sandip Agarwal

Indian IT stocks could climb to new all-time highs over the next six to 12 months as the impact of AI-led deflation eases and earnings growth improves, according to Sandip Agarwal, Fund Manager at Sowilo Investment Managers, which manages assets worth over $25 million.

“We are extremely bullish on the sector since April. Obviously, we cannot time the bottom, but I feel that deflation impact in this quarter was the worst, and after this, it will recede in a significant way. We will see substantial relief in the whole sector, and not only one particular company or two particular companies,” Agarwal said.

The IT index has rallied around 10% since Tata Consultancy Services (TCS) announced its results. Agarwal believes the gains could extend as companies see better revenue growth and improved margins, supported by the gradual adoption of AI by enterprise clients.

Agarwal expects Indian IT companies to deliver strong earnings growth over the next three years, even if their valuation multiples remain unchanged.

“I believe that this sector will give 45 to 70% cumulative EPS CAGR over next three years, and even if multiple remains, that is the minimum return you should expect in the sector,” he said.

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He added that investors need to look beyond headline numbers and assess the underlying earnings performance of IT companies, particularly the impact of currency movements and other income.

The depreciation of the rupee against the US dollar has boosted the reported rupee revenue growth of IT companies in recent quarters. However, Agarwal said the benefit needs to be assessed carefully because companies typically use rolling currency hedges to manage foreign exchange exposure.

Agarwal prefers IT services companies over engineering research and development (ER&D) firms at current valuations. While he expects ER&D companies to grow at around 2.50 times the long-term growth rate of IT services, he remains cautious about their valuations and the sustainability of recent market share gains.

He pointed out that some Indian ER&D companies have benefited from business opportunities linked to resource constraints faced by a large global competitor amid the Russia-Ukraine war. He wants to see how growth holds up after the conflict ends before reassessing his stance on the segment.

For now, he sees better risk-reward opportunities in IT services, particularly among midcap and smallcap companies.

Agarwal said some smaller IT services firms have substantial cash reserves relative to their market capitalisation, while their growth prospects could improve as enterprise AI adoption gathers pace.

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IT stocks could hit new all-time highs in 6–12 months, says Sandip Agarwal

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