Indian IT Earnings Season Begins: Investors Eye Demand Clues

The Indian IT services sector is poised to kick off its third-quarter earnings season with HCL Technologies Ltd and Tata Consultancy Services Ltd (TCS) releasing results on Monday. Expectations are for subdued performance, with analysts forecasting muted revenue growth for most companies. This slowdown is attributed to lingering subdued demand and a lack of substantial recovery in discretionary technology spending as clients remain cautious.

Muted Growth Outlook

Revenue growth in the seasonally weak Q3FY26 is likely to be marginal for many IT firms. Factors such as furloughs, lower employee utilization rates, and persistent macroeconomic uncertainties are expected to weigh on performance. Jefferies India anticipates overall revenue growth for its coverage universe to moderate to 1.2% sequentially in constant currency, marking it as the second-lowest Q3 growth in five years. Currency headwinds are also a concern, with aggregate US dollar revenues expected to trail constant currency growth due to a depreciating rupee against the dollar. Companies with significant European exposure, including Coforge, Tech Mahindra Ltd, and TCS, are particularly susceptible to these cross-currency pressures.

Sectoral Performance and Outperformance

Within the IT sector, the banking, financial services, and insurance (BFSI) vertical remains the most resilient. The high-tech sector is also maintaining positive momentum. However, the manufacturing segment continues to show weakness, largely influenced by the struggling automobile sub-sector, though non-auto areas exhibit some stability. Retail sector performance is expected to be company-specific, with HCL Technologies and Tech Mahindra observing early positive signs. Tier-2 IT companies are anticipated to continue their outperformance over larger competitors, owing to their greater agility and stronger positioning in cost-optimization deals. Persistent Systems Ltd and Coforge Ltd are expected to lead revenue growth among these agile players.

Deal Momentum and Future Prospects

Deal win momentum is projected to remain decent, with contracts primarily focusing on vendor consolidation and cost-takeout initiatives. Reports from ICICI Securities highlight a healthy total contract value (TCV) run-rate for firms like Tech Mahindra, Mphasis, LTIMindtree, Coforge, and Persistent Systems, driven by success in securing large deals. Emerging technologies like Generative AI (GenAI) and Agentic AI solutions are seen as expanding the total addressable market for mid-cap IT services, enabling them to compete more effectively with larger players on pricing.

Margin Pressures and Investor Focus

Operating margins in Q3 could face pressure from wage hikes and furloughs, though this might be partially offset by operating leverage and rupee depreciation. TCS, Wipro Ltd, Coforge, Hexaware Technologies Ltd, and Persistent Systems may witness sequential margin declines. Infosys Ltd is expected to maintain its margin band at 20-22%, HCL Technologies at 17-18%, and TCS at 26-28%. Despite these near-term challenges, the Nifty IT index has risen approximately 8% in the past three months, buoyed by rupee depreciation, increased AI-led deal activity, and optimism for FY27 discretionary spending recovery. Analysts at Motilal Oswal Financial Services suggest markets will look past seasonal weakness and focus on demand signals for client budgeting in 2026, with potential AI program deployments serving as early indicators. The current one-year forward price-to-earnings ratio for the Nifty IT index stands at a relatively high 27x, according to Bloomberg data.