The third-quarter earnings season for India's information technology sector kicks off this week, with industry giants Tata Consultancy Services (TCS) and HCL Technologies set to announce their results on Monday. Analysts anticipate a period of subdued performance, characteristic of a seasonally weak quarter, but investors are poised to scrutinize management commentary for early signs of a demand recovery in the coming fiscal year.
Quarterly Performance: Low Growth Expectations
Revenue growth for most major IT firms in Q3 of the 2025-26 financial year (Q3FY26) is projected to be muted. This is attributed to the typical year-end furloughs affecting utilization rates, coupled with persistent macroeconomic uncertainty that continues to curb client spending on discretionary technology projects. According to brokerage firm Jefferies India, the sequential constant currency revenue growth for their coverage is expected to moderate to 1.2%, marking it as the second-lowest Q3 growth in the past five years.
Among the large-cap players, HCL Technologies is likely to lead the growth pack, aided by its seasonally strong products and platforms business and some recovery in verticals like retail, consumer packaged goods, and healthcare. Larger peers Infosys Ltd and TCS are expected to post only marginal sequential growth. Infosys and HCL are anticipated to maintain their full-year revenue guidance of 2–3% and 4–5% for services, respectively.
Wipro Ltd will see a boost from the inclusion of a one-month contribution from its Harman DTS acquisition. Meanwhile, tier-2 companies like Persistent Systems and Coforge are expected to continue outperforming their larger rivals, thanks to better agility and a stronger focus on cost-optimization deals for clients.
Sectoral Trends and Deal Momentum
In terms of vertical performance, Banking, Financial Services and Insurance (BFSI) remains the most resilient sector for IT services. The hi-tech vertical is also maintaining positive momentum. However, manufacturing continues to struggle, primarily due to softness in the automobile segment, though non-auto areas are showing stability. The retail vertical's performance appears to be company-specific, with firms like HCL and Tech Mahindra reporting some green shoots.
Deal win momentum is expected to remain decent, but the nature of contracts hasn't changed significantly. The market is still dominated by vendor consolidation and cost-takeout projects. An ICICI Securities report from January 5 highlights that companies like Tech Mahindra, Mphasis, LTIMindtree, Coforge, and Persistent Systems are expected to maintain healthy total contract value run-rates by focusing on large deals. Notably, Generative AI and Agentic AI solutions are expanding the addressable market for mid-cap IT firms, allowing them to compete more effectively on pricing.
Margins, Valuations, and the Road Ahead
Operating margins for the quarter will be a mixed bag, impacted by wage hikes and furloughs. These headwinds will be partially offset by operating leverage and the depreciation of the Indian rupee. Companies like TCS, Wipro, Coforge, Hexaware, and Persistent could see sequential margin declines. Infosys is likely to maintain its margin band of 20-22%, HCL Tech between 17-18%, and TCS in the 26-28% range.
Despite the tepid quarterly outlook, the Nifty IT index has gained around 8% in the last three months. This rally is driven by rupee depreciation, traction in AI-led deals, and growing expectations of a recovery in discretionary spending in the 2026-27 fiscal year. Motilal Oswal Financial Services notes that markets will likely look past the seasonal weakness and instead focus on signals from the client budgeting cycle for calendar year 2026, with the March-April period being a key indicator.
However, valuations remain a concern. According to Bloomberg data, the Nifty IT index is trading at a one-year forward price-to-earnings multiple of 27x, which is considered rich in the current environment. As the earnings season unfolds, investor attention will firmly be on any commentary that provides clarity on the timing and strength of the long-awaited demand revival.
