Engineering R&D seen growing faster than IT services: Sowilo’s Sandip Agarwal

Engineering research and development (ER&D) companies are set to grow two to two-and-a-half times faster than traditional IT services, even after the sharp correction seen in recent months, according to Sandip Agarwal, Fund Manager at Sowilo Investment Managers. He said the slowdown in stock prices reflects cooling growth rates and stretched valuations, not a weakening of the long-term business opportunity.Explaining why he remains positive on the space, Agarwal stated that ER&D has much lower penetration than IT services, at roughly one-third or one-fourth of the size. He added that the skills required in this segment are far scarcer, creating a stronger competitive moat. “This space is bound to grow,” he said, adding that ER&D should do “phenomenally well in the next 10 years,” even though valuations needed to adjust.

Agarwal cautioned, however, that high multiples were inevitable targets for correction. He said price/earnings to growth (PEG) ratios of three to four times were unsustainable and needed to come down. This valuation reset has also driven a wave of acquisitions, as companies look to add specialised skills and fill capability gaps.

Referring to the recent acquisition by Cyient Semiconductors, Agarwal described the move as strategic but flagged execution risks. He stated that the deal appears expensive on a revenue basis and warned that break-even expectations by 2026-27 (FY27) could slip, especially given past experiences where key talent exited after acquisitions.

He also highlighted that while growth prospects are strong, margin profiles in semiconductor-linked ER&D businesses are likely to remain structurally lower than in traditional IT services and ER&D firms, which could dilute profitability over time.

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Turning to IT services, Agarwal said the sector is facing a more fundamental challenge. He explained that shrinking deal sizes and shorter execution timelines have eroded the balance-sheet advantage that large IT companies once enjoyed. As a result, mid- and small-cap IT firms have consistently outperformed large caps on revenue growth, a trend he expects to continue.

On Tata Consultancy Services, Agarwal welcomed the company’s improved disclosures, particularly the reporting of $1.5 billion in AI-related revenue and $11 billion in next-generation business. However, he said the base has become very large, making high growth harder to achieve. While he remains confident that Indian IT firms will continue to outperform global peers due to cost advantages, he believes large-cap IT companies will struggle to deliver strong growth in the current environment.

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Looking at the next six months, Agarwal said IT stocks could still see a tactical rebound. He stated that many investors have sharply reduced exposure, while the sector continues to offer strong cash flows, high governance standards and defensive characteristics. “At a price, people will come and buy,” he said, adding that IT remains a core portfolio holding for long-term investors, even as ER&D emerges as the stronger structural growth story.

For the entire interview, watch the accompanying video

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