Sandip Agarwal from Sowilo Investment Managers in an interview to ET Now said the initial set of large-cap IT numbers has been “slightly better than what was anticipated,” with both TCS and HCL Tech managing costs effectively. However, he cautioned against reading too much into the headline performance. According to him, two indicators matter most at this stage: the book-to-bill ratio and year-on-year constant currency growth.
He pointed out that book-to-bill for both companies has been “reasonably okay,” but stressed that it does not signal any major upside or demand revival. Year-on-year constant currency growth, he noted, remains “very, very subdued,” below 5% across large IT firms, a trend he expects to persist into the next quarter as well.
Agarwal underlined that rupee depreciation has emerged as a significant support. While dollar and constant currency growth looks weak, the translation benefit has lifted reported rupee revenues and profits. “Finally, for investors, it is the INR which also matters,” he said, adding that margins and currency gains are masking the lack of meaningful fundamental revenue growth. Despite this, he maintained that valuations remain stretched. “On a PEG ratio basis, the whole sector is still very, very expensive and not attractive in our opinion,” he said.
On TCS’s long-term aspiration of achieving 26% to 28% margins, ET Now highlighted the sharp reduction in employee count, with the company trimming roughly 11,000 employees during the quarter and nearly 30,000 since the start of the financial year. Agarwal described the manpower rationalisation as “very, very reasonable,” especially in the context of productivity gains driven by artificial intelligence.
He said AI-led efficiency improvements are in the range of 25% to 30%, while workforce reductions have been limited to about 3% to 5% cumulatively. “This is the right thing,” he said, noting that failure to right-size could hurt margins and create inefficiencies. Praising the sector’s leadership, Agarwal added that Indian IT management teams are “very pragmatic” and “very calculated and measured in their approach.”
Another drag on TCS’s profitability this quarter was the one-time non-cash impact related to the implementation of new labour codes. Agarwal explained that this needs to be viewed in two parts — a one-time adjustment and a much smaller recurring impact. The primary effect, he said, comes from repricing future liabilities such as gratuity and leave encashment due to changes in salary structures.He acknowledged that the labour code would have the maximum impact on organised sectors like IT and banking, but dismissed concerns of a long-term hit. “The one-time impact is big, which cannot be considered as a recurring impact anyway, and the recurring part is very, very small,” he said, adding that it does not warrant estimate cuts.
HCL Tech, meanwhile, stood out with a clear beat across parameters. Its 18.6% margin performance and upward revision in guidance drew attention. Agarwal said the numbers were “definitely much better than estimates,” driven largely by the products and platforms business, which tends to be seasonal and often delivers outsized surprises in one or two quarters each year.
However, he cautioned that services performance was largely in line, and full-year growth guidance still remains below 5%. He also flagged structural challenges facing the industry, including market maturity and intense competition. With entry barriers lowered post-Covid, deal pipelines now see 10 to 12 bidders instead of just two or three, intensifying pressure on pricing and growth.
While midcap and smallcap IT firms have outperformed in recent years, Agarwal noted that their valuation multiples are even more demanding. “Other than INR depreciation, there is no fundamental reason to be in the sector in the near term,” he said, adding that a meaningful correction in PEG ratios would be needed to turn constructive.
Looking ahead to Infosys, Agarwal expects a muted performance, citing furloughs in manufacturing-linked segments. He believes most IT companies could still manage modest positive surprises this quarter, largely because expectations have been cut sharply. Despite near-term challenges such as visa issues, tariff uncertainty and AI-led disruption, he praised the sector’s management teams for navigating the noise effectively.
“In the near term, stocks may languish due to time correction,” Agarwal said, but added that over a 12- to 18-month horizon, Indian IT could once again emerge as an attractive space for long-term investors.