IT sector faces short-term disappointment, but long-term outlook remains stable: Sandip Agarwal
Speaking to ET Now, market expert Sandip Agarwal from Sowilo Investment Managers acknowledged the short-term disappointment but urged investors to take a more measured view.
“So, as you rightly mentioned, there was some underperformance versus whatever was the street estimate. But let me give you a little more perspective.”
Agarwal emphasized that company guidance must be viewed in the context of recent volatility in the IT services space. Over the past few months, the industry has faced significant disruption, largely driven by fears surrounding artificial intelligence.
“You all know that the last three to six months have been very, very disrupting for the IT services space because there was a point of time where every day there were articles coming and saying that 70%, 80%, 90%, or even 100% of the IT services will not be required.”
According to him, sentiment has since stabilized, with extreme predictions giving way to more realistic expectations of gradual efficiency gains rather than outright disruption.
“At least people are saying there will be deflation, and I agree… 20% to 30% effort reduction because of AI spread over four to five years means 4–5% annual deflation.”Growth Guidance: Conservative but Not Weak
The industry’s projected growth range of 1.5% to 3.5% has been seen as underwhelming by the market. However, Agarwal argues that when adjusted for AI-led efficiency gains, the outlook appears more reasonable.
“If you take the upper end of the guidance, then it means like 8–9% kind of dollar growth… and if you take the lower end, we are talking about 5–6% growth.”
He added that such growth levels are sustainable and realistic for the sector over the next few years, especially for large companies.
“This is not an industry where you should look at double-digit growth… 6–7% growth for large companies and 8–10% for mid-sized companies is what you should build in.”
Currency Volatility and Margin Pressure
Another key concern has been the limited benefit from currency depreciation, particularly in companies like Infosys, where forex tailwinds failed to significantly boost margins.
Agarwal attributed this to the nature of hedging strategies and sudden currency movements.
“Whenever such sharp changes have happened in the currency, that quarter they have not been able to get much benefit because it is sudden.”
He explained that currency gains typically take time to reflect in financials and are often offset by short-term disruptions and increased costs.
“So, we should not expect magic in margins due to currency in one quarter. It takes time to flow.”
Additionally, seasonal factors such as furloughs and fewer working days also played a role in dampening performance.
“December quarter has a huge furlough impact and March quarter has a lesser number of working days… so that also has an impact.”
Sector Outlook: Patience Required
Despite near-term challenges, Agarwal remains optimistic about the sector’s medium-term trajectory.
“In my opinion, the sector should see 13–14% EPS growth for the next two years at least.” He also pointed out that IT companies historically tend to meet or exceed their guidance, barring major crises.
“Generally, they have always made their guidance at the upper end and sometimes have beaten guidance.”
However, he cautioned that investors should avoid overanalyzing short-term fluctuations in a business that is inherently complex and client-driven.
“In B2B business, things change so fast… your top client contributes 4–5% sometimes, and they can have a decision delay.”
Valuations and Investment Strategy
On valuations, Agarwal noted that much of the excess optimism has already been corrected, making the sector more attractive now than in recent months.
“A lot of froth is behind… we are maybe at the bottom of the prices of the stock.” He advised investors to focus on the broader sector rather than individual stock picks.
“Money is made when your call on the sector goes right rather than on the micro.” That said, he expressed some caution regarding the ER&D (Engineering Research & Development) segment, citing concerns around valuation excess.
The Bottom Line
While the IT sector may face short-term pressure from margin compression, currency volatility, and cautious client spending, the long-term fundamentals remain intact. Stable growth expectations, improving efficiency, and reasonable valuations suggest that patient investors could still find meaningful opportunities.
As Agarwal summed it up: “At the sector level, prices are good, things have corrected, and they are looking much more reasonable… the sector call is looking good right now.”
