He believes the next year could bring sharp changes in how AI is adopted and used, particularly in the IT services sector. “When this disruption comes in an explosive way, you will see a lot of human interaction. That is the time when Indian IT services will again become attractive,” Agarwal said. He expects a potential 30-40% rally in IT services stocks during that phase, followed by a period of stability or “time correction.”
Agarwal pointed out that while AI applications are expanding rapidly in consumer, defence, and industrial sectors, this is just the beginning of a longer cycle. “We are at the beginning of a big disruption right now,” he said.
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Agarwal noted a clear divide in the IT space between traditional services providers such as Infosys, Tata Consultancy Services (TCS), and HCLTech, and companies focused on engineering R&D (ER&D), like KPIT Technologies, Coforge, and Persistent Systems.
“I clearly believe that ER&D will grow at 2 to 2.5 times the rate of traditional IT services,” he said. While traditional IT may grow at 6-9% annually, he expects ER&D firms to grow around 14-15% over the long term. However, he cautioned that current valuations, measured by PEG (price/earnings to growth) ratios, are too high to justify fresh investments. “Other than high cash distribution and dividend yield, there is no other story to play in these stocks,” he added.
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On Tata Technologies and similar firms, Agarwal questioned the premium being assigned to growth. “The challenge is how much multiple you can assign for something growing at 7-8%, and how much for 12-14%,” he said. “Good companies with strong cash flows may deserve 2-2.5 PEG, but nothing is available at those levels right now.”
He noted that investors are holding onto these stocks because they offer some protection in uncertain markets, but at current valuations, “no one would like to do incremental buying.”
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Reflecting on past investment positions, Agarwal said his fund was “massively overweight” in IT last year when sentiment was weak. With the sector having rebounded since, he now expects a phase of limited movement. “AI will keep raising efficiency, reducing human effort, and that will impact revenue volume growth,” he said. While revenues may still grow, they are likely to be driven more by productivity than headcount expansion.
For the full interview, watch the accompanying video
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