TCS and HCL Paint Mixed Picture of IT Demand in Q3 Results
The December quarter results from India's IT giants, Tata Consultancy Services and HCL Technologies, revealed contrasting performances. While HCL surged ahead with strong numbers, TCS delivered more modest growth, highlighting the uneven nature of the current demand recovery in the technology services sector.
HCL Technologies: Strong Performance with Caveats
HCL Technologies reported impressive sequential constant currency revenue growth of 4.2% for Q3FY26. The company's products and platforms business, which typically sees seasonal strength in the December quarter, provided significant support. New deal wins reached a multi-quarter high with total contract value surging 43.5% year-on-year to $3 billion.
Management highlighted that booking momentum came primarily from applications and engineering services. Annual contract value bookings reached their highest level in four years during the quarter. The company raised its services revenue growth guidance for FY26 to 4.75-5.25% while narrowing overall growth expectations to 4-4.5%.
However, the revised outlook suggests a softer March quarter and weaker exit from FY26. Recent acquisitions including HPE's telco solutions business are not expected to contribute meaningfully until Q1FY27. Analysts noted that the product business uptick relied more on tactical license revenues than sustainable subscription models.
Tata Consultancy Services: India Business Leads Modest Growth
TCS reported more modest sequential constant currency revenue growth of 0.8% for the same quarter. The company's India business drove this growth while international markets remained subdued. Deal wins actually declined 9% year-on-year to $9.3 billion.
Although TCS doesn't provide formal revenue guidance, management expressed optimism about improving demand. They expect revenue growth in international markets to be higher in 2026 compared to 2025, based on their current deal pipeline and gradual market improvements.
Margin Performance and AI Growth
HCL's earnings before interest and tax margin expanded by 120 basis points sequentially to 18.6%, though services margins slipped slightly. The company maintained its FY26 margin guidance of 17-18%. TCS kept its margin steady at 25.2% excluding one-off items, reiterating its aspirational margin band of 26-28%.
Both companies reported continued momentum in artificial intelligence. HCL's advanced AI revenue grew 19.3% sequentially to $146 million, while TCS's annualized AI revenue reached $1.8 billion with 17% growth. TCS management noted that clients are progressing from experimental phases to scaled AI implementations.
Investor Reaction and Outlook
Despite these results, both stocks showed minimal movement following earnings announcements, reflecting continued investor caution. The lack of clear evidence for broad-based revival keeps markets wary.
Analysts point to significant differences in growth trajectories. Jefferies India estimates TCS will deliver around 5% recurring earnings per share growth over FY26-28, the lowest among top Indian IT firms. In contrast, they project HCL will achieve 10% recurring EPS growth, the highest among the top five IT companies.
Valuation differences reflect these growth expectations. HCL trades at a slight premium to TCS, with Bloomberg data showing FY27 estimated price-to-earnings multiples of 23x versus 21x respectively. This gap may persist due to HCL's superior revenue growth, though rich valuations could limit significant upside.
Goldman Sachs described the broader sector implications as neutral to modestly positive. With demand visibility remaining cloudy through FY26 and FY27, investors will need to maintain highly selective approaches to IT sector investments.
The divergent performances of these two industry leaders underscore the patchy nature of IT demand recovery. While certain segments show strength, broader market revival remains elusive, requiring careful stock selection and tempered expectations from investors.
