The recent selloff in Indian IT stocks may have created an opportunity rather than a warning sign, according to Sandip Agarwal, Fund Manager and Co-founder of Sowilo Investment Managers, who believes the sector could deliver 45% to 70% returns over the next three years, even as investors remain worried about artificial intelligence disrupting traditional outsourcing businesses.
His optimism comes at a time when sentiment towards the sector has weakened following cautious commentary from global technology companies, including IBM, and concerns that AI is reducing demand for conventional IT services.
"People have confused disruption with the cycle," he said, adding that while AI is undoubtedly disrupting the industry, every major technological shift over the past two decades has followed a similar pattern. "Initially the disruptor benefits, but IT services companies eventually adapt, retrain their workforce and become the last beneficiaries of that disruption."
End Of AI-Led Shock?
He believes Indian IT companies are now nearing the end of the AI-led pricing reset. As enterprises increasingly adopt AI, projects are becoming more efficient, often requiring fewer billable hours and leading to lower contract values. However, Agarwal says this has masked the underlying demand environment.
"If you adjust for the lower pricing on AI-led contracts, many companies are effectively growing at 12-14%, even though reported revenue growth appears close to zero," he said.
According to him, most of the pricing deflation should be absorbed over the next one or two quarters. Thereafter, he expects the sector to settle into a more sustainable phase of 6-7% dollar revenue growth, accompanied by 12-13% profit growth, aided by operating leverage and buybacks.
That earnings trajectory, he believes, could translate into 45-70% cumulative stock returns over the next three years—and potentially much sooner if markets begin pricing in the recovery early.
"The stock benefit may come in six to twelve months, even if the earnings benefit takes three years," Agarwal said.
He remains selective within the technology space, however. Agarwal continues to be cautious on engineering research and development (ER&D) companies, arguing that they are more exposed to AI-driven disruption because of the nature of their work. He expects the segment could see another 20% correction before valuations fully reflect the impact of AI.
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