Mid-Sized IT Outsourcers Defy Seasonal Weakness with Strong Q3 Performance
In a notable display of resilience, mid-sized information technology (IT) outsourcers Coforge Ltd and Mphasis Ltd have surpassed analyst expectations for the October-December 2025 quarter. This achievement mirrors a broader trend among their mid-sized peers, highlighting their ability to navigate a traditionally challenging period for the industry.
Revenue Growth Exceeds Forecasts
On Friday, Coforge, ranked as the seventh-largest IT services firm, reported third-quarter revenue of $478.2 million. This represents a sequential increase of 3.5% and a substantial 23% growth compared to the same period last year. Impressively, approximately 90% of this growth was attributed to robust demand from retailers and manufacturers.
Similarly, Mphasis, the eighth-largest player, recorded revenue of $451.2 million for the quarter. This figure marks a 1.35% rise sequentially and a 7.66% year-on-year increase. About three-fourths of Mphasis's growth stemmed from the banking sector, underscoring its strong foothold in financial services.
Analysts surveyed by Bloomberg had anticipated Coforge and Mphasis to achieve revenues of $470 million and $449 million, respectively, making their actual performance a positive surprise. The third quarter of the fiscal year is typically considered seasonally weak due to fewer billing days resulting from holidays, adding to the significance of these results.
Divergent Views on Demand Recovery
This strong performance comes against the backdrop of a $283-billion IT sector grappling with macroeconomic uncertainty and tepid demand for IT services. Unlike some of their peers who remain optimistic, Coforge and Mphasis have adopted differing stances on the pace of demand recovery.
Mphasis's management anticipates a prolonged recovery for IT services. During the company's post-earnings conference call on Thursday, Chief Executive Nitin Rakesh remarked, "I've actually said that discretionary spend, as we knew it, is unlikely to come back in the same shape and form." He added that while it is still early, "it is very apparent that spends are going to be stable to slightly up this year."
In contrast, Coforge's leadership expressed greater optimism. Sudhir Singh, CEO of Coforge, highlighted that the evolving technology services landscape is creating significant opportunities for firms with the right capabilities. "While two years ago, every Board was asking, how can we adopt AI? That question has now fundamentally changed," Singh stated during the company's analyst call on Friday. "Our customers are no longer interested in AI strategies or pilot programs. They are demanding proof of business impact."
This perspective aligns with comments from C. Vijayakumar, CEO of HCLTech, who emphasized focusing on creating new opportunities rather than waiting for a rebound in discretionary spending.
Profitability and Margin Pressures
Despite the revenue gains, profitability emerged as a concern for both companies. Mphasis reported a net profit of ₹442 million, reflecting a 5.7% sequential decline, while Coforge's net profit fell by 33% to ₹250 crore on a quarterly basis.
Operating margins also faced pressure during the quarter. Coforge ended with an operating margin of 13.4%, down 60 basis points sequentially, largely due to wage hikes. Mphasis recorded a margin of 15.2%, a decrease of 10 basis points. Both firms incurred one-time costs related to new labour codes—₹118 crore for Coforge and ₹36 crore for Mphasis—which increased employee base salaries and operational expenses.
To date, the cumulative impact of labour code adjustments on IT outsourcers, including LTIMindtree and Persistent Systems, has reached approximately $592 million.
Headcount Expansion and Future Outlook
In terms of workforce growth, Coforge added 445 employees, bringing its total headcount to 35,341, while Mphasis increased its staff by 463 to 31,272. This expansion is consistent with trends among mid-sized peers, such as LTIMindtree and Persistent Systems, which added 1,511 and 487 employees, respectively.
Looking ahead, Coforge has not yet incorporated revenue from its $2.36 billion acquisition of Encora in December 2024, with completion expected by April. Both companies refrained from disclosing specific revenue figures from Generative AI initiatives, adopting a less cautious stance compared to larger industry players.
While the top five IT firms are projected to experience low single-digit growth for the third consecutive year, with HCLTech leading at an estimated 4.5%, mid-cap IT outsourcing companies like Coforge and Mphasis do not provide quarterly or full-year revenue guidance. Their recent performance, however, suggests a potential for sustained momentum in a challenging market environment.
