Fed cuts bring clarity but AI disruption to reshape IT growth; valuations a challenge for FY26–27: Sandip Agarwal

The US Federal Reserve’s latest rate cut may not materially boost spending in the near term, but its clear guidance ruling out future hikes has removed a major overhang for global corporates—including Indian IT clients—says Sandip Agarwal, Fund Manager & Co-founder, Sowilo Investment Managers. Speaking to ET Now, Agarwal said the improved visibility around budgets is positive, but the real disruption will stem from AI-driven “effort cuts” that reshape how IT deals are structured.

Fed eases uncertainty, But AI will reset IT revenues

Agarwal noted that while the rate cut itself offers limited relief, the Fed’s messaging has restored stability:
“Companies were struggling to decide how much to allocate to their discretionary IT spends. Now that uncertainty has reduced,” he said.


The bigger shift, however, is the rollout of AI, which is now moving from infrastructure build-out—benefiting Nvidia, AMD and other hardware players—to mainstream enterprise deployment.

“As AI adoption rises, you’ll see two things: new contracts and cannibalisation of existing ones due to reduced effort requirements. Indian IT will manage this better than global peers, but growth will remain flattish for the next 12 months,” he added.

FY26: Limited growth; FY27 outlook hinges on client budgets

Citing seasonality, Agarwal expects weak traction in the December and March quarters due to fewer working days and furloughs.

“For FY26, I don’t expect major surprises. But if rate cuts continue, client budgets communicated in January could be slightly better,” he said.

Agarwal believes large IT companies can still deliver 6–7% growth, while midcaps could post 10–12%, and specialised ER&D players 15–17%. But the problem, he says, is valuation mismatch.

Largecaps at high multiples despite mid-single-digit growth

• Midcaps at ~30x earnings
• ER&D firms at 40x+ despite modest growth drivers

“IT remains cash-rich with no working-capital stress or capex needs, but it is now a low-growth, mature sector. Valuations—not fundamentals—are the challenge.”

TCS–coastal cloud deal signals wave of skill-based acquisitions

Agarwal called TCS’ acquisition of Coastal Cloud a strategically important move. “These deals are about buying skill sets. Valuing talent is essential because IT’s market cap itself rests on manpower and capabilities,” he said.

He expects more small-sized AI capability acquisitions across the sector in the next 12–18 months, especially as valuations of niche players have corrected.

“This will help bridge the AI skills gap for Indian IT. But a complete reset of the industry’s growth base will still take another year,” he added.

What is the bottom line?

• Fed clarity helps, but AI-led disruption will shape IT growth more than rate cuts.
• FY26 likely muted; FY27 commentary could turn slightly optimistic if budgets improve.
• Indian IT may post manageable growth, but valuations remain stretched.
• Expect a wave of AI skill-set acquisitions by large IT firms.
• Industry-wide growth reset may take another 12 months before stabilising.