Speaking to ET Now, market expert Sandip Agarwal from Sowilo Investment Managers said the seasonal impact of furloughs, especially in manufacturing-linked businesses, has limited the number of working days in Q3, making it difficult to expect any meaningful upside surprises.
“This quarter, as you know, there is a December month where there are furloughs on the manufacturing side, and because of that the working days themselves are low. So, expecting anything big in this quarter from any company is a little difficult. This will be a kind of modest quarter with flattish growth for the large names. Also, there is no big impact of any kind of cost escalation, so we do not see a big decline or uptick in margins,” Agarwal said.
According to him, this is one of those quarters where forward-looking commentary matters far more than the reported numbers. With client budgets typically communicated in the first week of January, IT managements are expected to offer some colour on demand trends, though a sharp recovery still appears distant.
“In my view, this is a quarter where commentary has always been more important than numbers. In the IT world, the first week of January is when budgets from clients start getting communicated to vendors, and some colour of that most managements should be able to give. Although, I believe that we are still away from any good growth numbers coming in from the sector for the next 12 to 18 months,” he added.
Agarwal pointed out that the sector’s core markets are now mature, making high growth rates increasingly difficult to achieve.
Deal wins remain modest
On deal momentum, expectations remain tempered even for early reporters like TCS and HCL Technologies.
“This quarter, we have not heard any big deal announcement, honestly. Even on the deal front, the same book-to-bill ratio of slightly less than one or around one is what we are expecting, and most companies will be in that range,” Agarwal said.
He highlighted a structural shift in the industry, where smaller and mid-sized players are now competing aggressively for deals that were once the preserve of large incumbents.
“The challenge is that a lot of these small and mid-sized players are now participating in every deal. If you see the top two Indian IT players, the return of the last four to five years on the stock is almost zero. Earlier, there were many deals in which only Accenture and TCS were participating. Now, post-Covid, due to digital disruption and shorter execution periods, even the smallest companies are allowed,” he explained.
According to Agarwal, the traditional advantages of scale and balance sheet strength have diminished, leading to a far more democratised deal environment.
“The edge of balance sheet and size is completely gone. All deals are now up for everyone. Whoever can execute better, at a cheaper price and quickly, will get the deal,” he said.
AI to support margins, not growth
While artificial intelligence is increasingly being highlighted in deal wins, Agarwal cautioned against expecting a dramatic transformation of income statements in the near term.
“You would not see much margin decline in the sector for the next few years because employee numbers will keep going slightly down, or revenue growth will be higher than employee growth for sure. This trend will continue and further accelerate,” he said.
He added that currency tailwinds and lower wage pressure should help protect margins, even as growth remains modest.
“This is a sector which is ex-growth now. For large names, you can expect 7–8% kind of EPS growth and 4–5% revenue growth over a longer period. For midcaps, add another 3–4%, and for smallcaps, a further 3–4%,” Agarwal noted.
Prefer smaller names, watch valuations closely
In terms of positioning, Agarwal suggested a reversal of the traditional pecking order.
“I will give you a clear formula. You should prefer smallcap over midcap and prefer midcap over largecap. That should be the order because of the changing dynamics of the industry,” he said.
He also stressed that investors should shift focus from PE ratios to PEG ratios, given the sector’s limited growth profile.
“PE ratio is completely misleading. There is no growth. When you look at the PEG ratio, you will be surprised that what looks expensive on PE is not actually expensive. PEG ratio is the right measure,” he said, adding that ER&D-focused companies remain attractive, albeit currently expensive.
