Holiday-shortened Q3 won’t hold surprises for IT, but investors will search for demand signals
Revenue growth for most technology firms in the seasonally weak Q3 is muted due to furloughs, lower utilization and continued macro-economic uncertainty.
Subdued demand, and no substantial recovery in discretionary technology spending amid client caution should keep big positive surprises at bay as IT companies kick off the third-quarter earnings season with HCL Technologies Ltd and Tata Consultancy Services Ltd (TCS) on Monday. Revenue growth for most technology firms in the seasonally weak Q3FY26 is likely to be muted due to furloughs, lower utilization and continued macro-economic uncertainty. Furloughs would be at similar levels year-on-year.
Against this backdrop, HCL would lead growth aided by seasonally strong products & platforms business and some recovery in retail, consumer packaged goods, and healthcare. Larger peers Infosys Ltd and TCS would see marginal sequential growth. Infosys and HCL are expected to retain their FY26 revenue growth guidance of 2–3% and 4–5% (services), respectively. Wipro Ltd’s sequential revenue growth will be aided by the contribution from Harman DTS (one-month contribution in Q3). Tier-2 companies would continue to outperform larger competitors due to better agility and stronger exposure to cost-optimization deals. Revenue growth is expected to be led by Persistent Systems Ltd and Coforge Ltd.
“We expect overall revenue growth for our coverage to moderate slightly to 1.2% sequentially constant currency (cc) (+0.8% year-on-year cc) with growth in Q3FY26 being the second lowest in a Q3 over the past five years," said Jefferies India. Aggregate US dollar revenues are expected to grow 0.9% QoQ, 30 basis points lower than cc growth, as all major currencies have depreciated against the US dollar in Q3, the brokerage said. IT firms with higher exposure to Europe, including Coforge, Tech Mahindra Ltd and TCS, will face higher cross-currency headwinds.
Among sectors, banking, financial services and insurance (BFSI) remains the most resilient vertical. Hi-tech is also maintaining positive momentum. Manufacturing remains weak overall, primarily due to continued softness in the automobile segment, although non-auto sub-segments are showing some stability. The performance of the retail vertical is likely to be more company-specific. Here, HCL and Tech Mahindra are witnessing green shoots.
Deal momentum
Deal win momentum is also expected to be decent, but the nature of contracts remains the same – primarily vendor consolidation and cost-takeout projects. “We expect the healthy total contract value run-rate to continue for TechM (~$800 million), Mphasis (~$500 million), LTIMindtree (~$1,400 million), Coforge (~$ 500 million) and Persistent Systems (~$ 600 million) led by a focus on winning large deals," said an ICICI Securities report dated 5 January. GenAI and Agentic AI solutions are expanding the total addressable market for mid-cap IT services, helping them compete with large-cap players on pricing, it added.
Q3 operating margins could be affected by wage hikes and furloughs, which would be partly offset by operating leverage and rupee depreciation. TCS, Wipro, Coforge, Hexaware and Persistent could see sequential margin declines. Infosys is likely to maintain a margin band of 20-22%, HCL Tech 17-18%, and TCS 26-28%.
In the past three months, the Nifty IT index is up around 8%. Rupee depreciation, traction in AI-led deal activity, and expectations of discretionary spend recovery in FY27 are driving stocks higher. “We think markets are likely to look through this seasonality and instead focus on signals around the demand environment from client budgeting for 2026," said Motilal Oswal Financial Services. The March-April 2026 budget reset period may serve as an initial indicator, with some AI programs potentially transitioning from preparation to early deployment, it added. According to Bloomberg data, the Nifty IT index is trading at a one-year forward price-to-earnings of 27x, which is pricey in the current scenario.
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