Agarwal believes investors are mistakenly treating artificial intelligence (AI) as a permanent disruption to the Indian IT industry instead of recognising it as part of a normal technology cycle. He says the pessimism surrounding the sector has pushed valuations to attractive levels, prompting his firm to significantly increase its exposure to IT stocks.
“I am reasonably confident that, if you do the numbers, the EPS has to grow by 45 to 70% in next three years from here. In worst-case scenario, so I believe that at same multiple also these stocks will give you 45 to 70% return in next three years,” Agarwal said.
According to him, every major technology wave follows a similar pattern. Companies that build the technology benefit first, followed by firms that commercialise it. Indian IT services companies, which help enterprises implement and manage technology, usually benefit only after businesses begin adopting these technologies at scale.
“People are confusing the disruption with the cycle. See, these are two different things: disruption is one and cycle is different,” he said.
He expects enterprise AI adoption to eventually drive demand for Indian IT services, just as previous technology cycles have done. While he does not expect rapid revenue growth, he believes the next phase will be driven by stronger profitability.
“This cycle, I’m very confident it is a profit growth cycle, and not a revenue growth cycle,” Agarwal said. He expects revenue growth of 6–7% for large-cap IT companies and 10–12% for well-managed mid-sized firms, with profit growth outpacing revenue growth.
Agarwal believes the current quarter, the July-September quarter of 2026 (Q2FY276) or at worst the next one, the October-December quarter of 2026 (Q3FY27) could mark the turning point for the sector. He expects most IT companies to return to growth, except for a few businesses dealing with company-specific issues.
Given this outlook, he prefers traditional IT services companies across market capitalisations, particularly businesses trading at reasonable valuations. While he also likes select large-cap names, he sees attractive opportunities among smaller, well-run IT services companies.
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However, he remains cautious on engineering research and development (ER&D) companies, despite the steep correction seen in several stocks.
“Don’t buy ER&D. I think ER&D is still too overvalued. There’ll be a lot more corrections in ER&D space,” he said.
Agarwal estimates that ER&D companies could decline by another 20%, arguing that although they are likely to grow faster than traditional IT services, their valuations still do not justify the premium.
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