According to Sandip Agarwal, Fund Manager at Sowilo Investment Managers, Indian IT services companies are positioned for a meaningful recovery as artificial intelligence adoption begins benefiting service providers. As reported by CNBC TV18, 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. 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 driving strong earnings growth.
According to Agarwal's analysis, the EPS growth for most companies will be between 35-40% to 70% over the next three years. As reported by CNBC TV18, this optimistic outlook is based on the AI opportunity unfolding in stages, with hardware companies like Nvidia and AMD being the first beneficiaries, followed by technology platform providers, and now IT services firms. The value chain progression starts with hardware and moves to service providers, with benefits expected to materialize in one or two quarters.
While large IT companies will benefit from the AI boom, Agarwal sees even greater opportunities among smaller and mid-sized IT services firms. As reported by CNBC TV18, 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. The first leg of democratisation due to digital, and now second leg of democratisation due to AI is happening, making small and mid-cap players within the IT services segment better positioned for growth.
Beyond software services, Agarwal believes the AI boom will create opportunities across the broader data-centre ecosystem. According to CNBC TV18, 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. Recent investments in data centres and AI infrastructure in India are welcomed by Agarwal, though he notes 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.
Despite the positive outlook, Agarwal remains cautious on engineering research and development (ER&D) companies despite sharp corrections in many of these stocks. As reported by CNBC TV18, 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, he prefers traditional IT services companies, where he sees a clearer balance between valuation and earnings potential, expecting investors to earn attractive returns even if valuation multiples remain unchanged provided earnings growth materializes as expected.
