Achche din for homegrown IT services companies delayed

The top three of Tata Consultancy Services Ltd, Infosys Ltd, and HCL Technologies Ltd are expected to report sequential revenue growth of 0.1-3.6%, with growth led by third-largest HCLTech, estimates from Motilal Oswal Financial Services, Axis Capital, ICICI Securities and Deven Choksey Research showed. Fourth-largest Wipro Ltd and fifth-largest Tech Mahindra Ltd are expected to report either a revenue decline of up to 0.3% and 1.2%, or at best a growth of 2.3% and 1.2%, respectively.

“Amid macro-tariff uncertainty and a new tech cycle, we believe clients remain cautious on committing incremental spending to large programmes. As a result, we expect demand to stay steady, at best marginally incremental, until January 2026, as planning cycles reset and budgets firm up," Motilal Oswal analysts Abhishek Pathak, Keval Bhagat, and Tushar Dhonde, in a 2 January note.

According to a Mint analysis, this is the third straight quarter where brokerages have outlined sequential growth below 4%, signalling a tempered outlook. This follows efforts by companies to pursue new growth avenues.

TCS and HCLTech release their December quarter earnings on 12 January, Infosys on 14 January, and Tech Mahindra on 16 January. Wipro is yet to announce its earnings date.

The quarter may send out "mixed signals", Axis Capital said in a 2 January report. Analysts Manik Taneja, Rohit Thorat, and Rushabh Jain said "company-specific factors" will drive sequential growth for TCS, Wipro and HCL Tech, while Infosys and Tech Mahindra may slow on furloughs as fewer employees are available to work.

Strategic shift

The December quarter is typically weak for IT companies due to holidays and fewer working days, resulting in lower billings than usual. This year, it's worsened by geopolitical tensions, tariff-related uncertainties in the US and Europe.

Still, not everyone is hurt by the seasonality. All four brokerages expect Noida-based HCLTech, India's third-largest IT company, to outperform the top five with growth of 2-3.6% on a quarterly basis.

“We expect HCLTech to lead on revenue growth (2.2% QoQ CC) and margin expansion (~50bps QoQ), supported by positive seasonality in the software product business," said ICICI Securities analysts Ruchi Mukhija, Aditi Patil, and Seema Nayak, in a note dated 24 December.

HCLTech purchased seven software products from International Business Machines Corp in December 2018 for $1.8 billion. It has since repackaged and sold these software products to clients. About 9% of its business is derived from the sale of such products and their licenses, with sales peaking in the third quarter, which helps offset seasonal fluctuations.

Companies are turning to acquisitions and focusing on AI in a rapidly changing tech landscape. On 9 October, TCS announced a $6.5 billion investment over six years to building data centres, its largest pivot since going public in 2004. Coforge Ltd has announced a $2.4 billion buyout of the US-based software firm Encora, marking the sector’s largest acquisition.

Product impact

Significantly, Bengaluru-based Wipro, which has experienced revenue decline over the last two years, is expected to grow at the second-fastest rate among the top five, according to three of the four brokerages. Much of this is based on the $375 million Harman acquisition announced in August last year and the 10-year deal with UK-based insurance provider Phoenix, valued at $650 million, signed in March last year.

“Revenue growth in Q3 would be aided by the ramp-up of the Phoenix deal and vendor consolidation deals won with two large US banks. Q3FY26 could have some tailwinds from the Harman acquisition," said the ICICI Bank analysts, who expect the company to grow 1.1% in the third quarter.

To be sure, Wipro is the only major IT outsourcing company to disclose quarterly targets. Its management expects Q3 revenue to either decline sequentially by 0.5% or increase up to 1.5%.

Two of the country’s largest tech services firms, including TCS and Infosys, are expected to grow at best by 2% due to seasonal weakness. Weakness is expected to continue affecting second-half growth as well.

“We expect revenue growth of 0.5% QoQ CC for TCS and 0.3% for INFO, driven by seasonal furloughs, with 2H weaker than 1H as growth was front-ended, in line with prior years," said the Motilal Oswal analysts.

Mid-cap outperformance

TCS, Infosys, HCLTech, Wipro, and Tech Mahindra ended the last fiscal year with revenues of $30.18 billion, $19.28 billion, $13.84 billion, $10.51 billion, and $6.26 billion, respectively.

On the other hand, mid-sized IT services companies earning between $1 billion and $5 billion in annual revenue are expected to outperform their larger peers for the third consecutive quarter. Ninth-largest Persistent Systems is expected to come out ahead, with revenue growth of 3.5%.

According to Yogesh Tiwari, research analyst at Deven Choksey Research, much of this growth is “driven by sustained momentum in digital transformation, AI-led engineering, and platform modernization across BFSI, Hi-Tech, and Healthcare verticals."

Seventh-largest Coforge Ltd, which jumped two places in Indian IT’s pecking order last year, is expected to grow moderately at 3% as its largest deal with Sabre has almost ramped up.

For now, demand is expected to improve next fiscal year.

"We believe that the demand environment will recover in FY27E, with companies prioritising strategic investments in next-gen technologies, particularly AI, to drive future deal-wins and revenue growth," said HDFC Securities analysts Amit Chandra, Vinesh Vala, and Maitreyee Vaishampayan, in a note dated 8 December.