At the heart of the discussion is the Total Contract Value (TCV), often seen as a forward-looking barometer of demand in the IT services industry. Contrary to concerns that AI-led efficiencies might shrink deal sizes, the latest figure has come in strong.
Speaking with ET Now on TCS earnings, Sandip Agarwal from Sowilo Investment Managers said, “People were expecting a sharp decline in TCV because of AI, but at $12 billion it is robust and steady compared to the last two years. Exiting the fourth quarter at this level is a strong finish.” This indicates that while technology shifts are underway, client spending and deal momentum remain intact, providing near-term visibility for large IT firms.
The broader growth outlook, too, appears intact despite the evolving landscape. “You will still see 5–6% growth in largecaps in dollar terms, and in rupee terms, earnings CAGR of 16–17% over the next two years. If that happens, stocks could rerate at least 25%,” he said.
This suggests that even with modest growth in dollar revenues, currency movements and operational leverage could support healthy earnings expansion, keeping investor interest alive.
A key debate in the market is whether IT services companies can retain relevance as AI platforms become more advanced. However, the core positioning of these firms as system integrators remains a strong moat. “IT services companies are basically integrators. AI is like any other technology—someone has to integrate it, make it usable, and deliver outcomes. That role is not going anywhere,” he added. That said, the economics of the business may evolve, with some benefits being shared with clients. “Some of the savings companies earlier retained will now have to be passed on to clients because of AI.”
On margins, expectations of immediate gains from currency depreciation may be misplaced. “People expect immediate margin gains from currency moves, but that is not how it works. Benefits take time to flow to the bottom line.” Over the longer term, however, currency remains a structural tailwind. “Every 1% rupee depreciation gives roughly 1% EPS accretion for large companies like TCS or Infosys.” Yet, historical trends serve as a reminder that such gains are often offset. “Despite rupee depreciation in the past, margins did not improve much due to wage hikes and ongoing investments,” he said.
Taken together, the outlook for the IT services sector appears balanced. AI may reshape cost structures and pricing dynamics, but it is unlikely to dismantle the core business model overnight. Instead, the transition is expected to be gradual, giving companies time to adapt. For investors, this means moderating expectations while recognising the sector’s resilience. If earnings compound as anticipated and valuations remain supportive, the case for a gradual rerating of IT stocks remains firmly on the table.
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