Rupee at 90+: Why IT is Becoming a Safe Haven and Where the Real Risks Still Hide

The sharp fall in the rupee has given India’s IT sector a near-term profit cushion, but analysts caution against assuming a sustained revaluation. According to Sandip Agarwal, principal officer and co-founder of Sowilo Investment Managers, the recent rally in IT stocks is largely a defensive move as investors seek protection from currency volatility rather than a signal of structural growth.Agarwal explains that every 1% depreciation of the rupee increases IT EBITDA margins by about 30 basis points, which investors have quickly priced in. “With the rupee depreciating by ₹3-4 in the last few months, the market is seeing a margin improvement of almost 100 basis points. But this benefit is visible only at the EBITDA level; below that, hedge-related losses offset the gains,” he said.

Valuations still expensive versus growth prospects

Despite the recovery, Agarwal believes IT valuations remain low relative to growth prospects. Traditional benchmarks such as the five-year average price-to-earnings ratio are misleading, he says, because industry growth rates have structurally slowed as the US and European markets mature.

“PEG ratios between 3x and 8x are quite expensive for a sector that is already deeply penetrated in the largest markets. With limited visibility of dollar revenue growth and AI compressing manual efforts, I don’t see meaningful PAT growth net of currency benefits,” Agarwal added.

Preference for ER&D over traditional IT services

Agarwal prefers Engineering & R&D (ER&D) companies over regular IT services. Names like KPIT, Tata Elxsi, Tata Technologies and L&T Technology Services stand out for their higher structural growth – typically 1.5 to 2.5x faster than legacy IT services.

However, he cautions that even ER&D trades at high valuations of 35 to 45 times earnings, making careful stock selection essential. “Exposure to ER&D is fine for long-term investors, but traditional IT lacks strong triggers for the next twelve to eighteen months.”

Midsize and smaller IT companies are best positioned for AI-led disruption

Agarwal expects mid-cap technology companies to continue to outperform thanks to their ability to win smaller, faster-executing digital and AI deals, which large IT companies often cannot serve efficiently. With deal sizes shrinking as AI accelerates automation, smaller players can make disproportionate profits, similar to the post-Covid trend. He believes investors should look at even smaller companies that resemble today’s midcaps from five years ago. “Each disruption reduces deal size and shortens execution cycles, expanding the universe of addressable suppliers.”

Beyond IT: platforms, capital markets, production in focus

Outside IT, Agarwal sees great opportunities in:

• Digital platforms (Swiggy, Urban Company, etc.), driven by rising labor productivity through technology-enabled marketplaces.
• Capital markets, where the financialization of savings accelerates as incomes rise.
• The manufacturing sector benefits from domestic policy support and supply chain diversification.
• Conglomerates with multiple scalable business lines.

He remains constructive on India’s broader market trajectory despite temporary pain in mid and small caps. “Fundamentally, earnings growth in mid- and small-caps is much higher than in large-caps. This phase is temporary: the next phase of returns will come from them.”