Speaking to ET Now, Agarwal admitted that the sharp run-up is hard to justify based on core business performance. He noted that a range of market-driven factors may be at play rather than any significant revival in demand.
“So, I believe that the reason for why the index has gone up is very tough to call out because there could be multiple things leading to that,” he said, pointing at possibilities such as short covering or fund managers increasing exposure after being underweight.
What concerns him most is the steady decline in effort-based billing, the backbone of India’s software services industry.
“…the efforts are going down by 30% in IT software services and you cannot compensate that so quickly,” Agarwal cautioned. Lower effort directly compresses revenue potential, especially when pricing increases are nowhere close to offsetting the drop.
Despite the index rally, he believes the sector’s current valuations—both P/E and PEG ratios—are hard to justify.
“I do not see any trigger for growth in the sector for next few quarters,” he warned, adding that largecaps may manage 4–5% growth while midcaps could deliver 10–12%, levels too low to warrant PEG multiples in the range of 3–5.
Q2 looked stable, but expectations were already low
While the second quarter earnings season surprised on the upside for many IT names, Agarwal emphasised that this must be viewed in context.
“The expectations were very-very low and because expectations were low, the numbers were looking in line or decent,” he said.
He pointed out that while companies like Persistent and Coforge showed strength, the valuations they command—30–35 times earnings—leave little room for error, especially when falling effort levels are yet to fully play out in reported numbers.
Agarwal expects volume growth to remain sluggish as new deals come in at smaller sizes and renewals reflect the reduced effort intensity the industry is grappling with.
“I do not see the industry to grow at more than 6-7%,” he said, reiterating that even this might prove challenging without a meaningful demand revival.
Margins Are Not the Savior Investors Think
Some analysts argue that even if revenue growth is weak, margin expansion could lift earnings. But Agarwal disagrees, calling this line of reasoning simplistic.
“Margins cannot improve because every year you have to give wage hike… you cannot make a case for a higher earnings growth than revenue growth,” he explained.
With inflation continuing to push up costs—from salaries to travel and training—he insists that any EPS growth will broadly mirror revenue growth, not exceed it.
His caution extends to the sector’s sensitivity to global tech sentiment. While some link IT’s fortunes to AI-related valuations in the US, Agarwal believes the impact is overestimated. The more relevant metric, he said, is the high-tech and product engineering vertical, which accounts for just 17–18% of revenue.
“The impact is very limited… we cannot see good growth, but at the same time whatever we have, we will be able to easily defend it,” he stated.
Order Books Don’t Tell the Full Story
Many mid-tier IT firms reported strong deal wins in recent quarters. But Agarwal urged caution in interpreting these numbers.
He explained that deal duration, project type, and execution timelines vary greatly, making order books an unreliable predictor of near-term revenue.
Further, the effort reduction trend—something he says he is witnessing for the first time in three decades—poses a structural challenge the industry has not encountered before.
“This is the first disruption where efforts have gone down… if efforts are going, the time and material thing itself is going off, then how will you make money?” he asked.
Growth Defensible, But Not Exciting
While Agarwal does not foresee a major downside in earnings, he remains unconvinced that the sector can deliver the kind of growth required to justify premium valuations.
“…why should I pay so much high PEG ratios,” he concluded.
