After a prolonged period of weak growth, Agarwal believes the sector is entering a new phase where earnings could rise significantly over the next three years.
Agarwal said the artificial intelligence (AI) opportunity is unfolding in stages. The first beneficiaries were hardware companies such as Nvidia and AMD, followed by technology platform providers. The next leg, he believes, will belong to IT services firms.
“This value chain is very simple, it starts with hardware… and then will come the service provider, which we are there, and that will start now in one or two quarters,” he said.
According to Agarwal, the large-cap IT sector’s growth rate could improve from around zero in recent years to 6-7% going forward. Combined with currency support, this could drive strong earnings growth. “The EPS growth for most of the companies will be between 35-40% to 70% over the next three years,” he said.
While he expects large IT companies to benefit, Agarwal sees even greater opportunities among smaller and mid-sized IT services firms. He argues that AI is creating a second wave of democratisation in the industry by allowing companies with the right talent and resources to compete more effectively for new business.
“First leg of democratisation due to digital, and now second leg of democratisation due to AI is happening, so the small and mid-cap player within the IT services segment will do better,” he said.
Beyond software services, Agarwal believes the AI boom will create opportunities across the broader data-centre ecosystem. Companies involved in hardware distribution, connectivity infrastructure, cooling systems and stainless-steel pipes could benefit as new data centres are built to support AI workloads.
However, he remains cautious on engineering research and development (ER&D) companies despite the sharp correction in many of these stocks. While he expects these firms to continue growing faster than traditional IT services companies, he believes valuations remain expensive and may need to fall further before becoming attractive investment opportunities.
Instead, Agarwal prefers traditional IT services companies, where he sees a clearer balance between valuation and earnings potential. He expects investors to earn attractive returns even if valuation multiples remain unchanged, provided earnings growth materialises as expected.
“Even if multiples remain the same, you will make that kind of return. That is what my thesis is invested in IT services right now,” he said.
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On India’s broader AI opportunity, Agarwal welcomed recent investments in data centres and AI infrastructure. However, he noted that the biggest gains would come if Indian companies could capture a larger share of AI-driven value creation rather than benefiting only from supporting infrastructure demand.
For now, his message is clear: AI is not a threat to India’s IT services industry. Instead, it could become the catalyst for the sector’s next growth cycle.
Disclaimer: Network18 and TV18, the companies that operate CNBC-TV18, are controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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