Mixed Signals for India's IT Sector as Recovery Remains Elusive
India's information technology industry continues to navigate turbulent waters as the fiscal year 2026 progresses, with investors balancing between hope and concern over delayed revenue growth recovery. Despite some positive indicators in the September quarter, the overall outlook remains cautious due to persistent challenges in the global economic environment.
Q2 Performance: Glimmers of Hope Amid Challenges
The September quarter earnings season brought modest sequential revenue growth for most technology companies, with selective recovery observed in key verticals. According to a study by BNP Paribas Securities (India) covering eleven companies—including five large-caps and six mid-caps—64% reported revenue growth that surpassed lowered analyst expectations. This marks a significant improvement from the 53% that exceeded predictions in the previous quarter.
On the margin front, the picture also showed improvement with 55% of companies crossing expectations, compared to just 13% in the preceding quarter. Notable developments included Infosys Ltd and HCL Technologies raising the lower end of their FY26 revenue growth guidance, indicating some confidence in near-term prospects.
Earnings before interest and tax margins received support from favorable foreign currency movements, particularly the falling rupee that translates into higher revenue, along with continued cost-saving initiatives across the sector.
Cost Containment and Strategic Shifts
To protect profitability in a challenging demand environment, IT companies have intensified their focus on cost containment measures, automation, and optimizing workforce composition. Companies are increasingly relying on fewer costly senior workers and have reduced their dependence on H1-B visas, leading to increased investment in offshore offerings that support margin expansion.
The banking, financial services and insurance sector emerged as a bright spot with visible recovery, while manufacturing and consumer businesses faced uncertainty largely driven by tariff-related concerns. Industry leaders reported that clients continue to take longer spending decisions, indicating that the demand environment has remained largely unchanged over the past quarter.
Deal Dynamics and Competitive Pressures
Despite the challenging environment, companies reported healthy deal wins during the quarter, primarily driven by cost takeout deals—contracts where clients seek permanent expense reduction—and AI-led solution projects. Data from Nuvama Research shows that on an aggregate basis, eleven IT companies witnessed an impressive 25% year-on-year growth in total contract value of deal wins.
However, this growth comes with significant caveats. Large cost take-out deals typically carry lower margins, creating pressure on profitability. Companies now require either a recovery in discretionary spending or further rupee depreciation to offset this risk. According to Kotak Institutional Equities, the number of available cost take-out deals is insufficient to meet everyone's growth aspirations in the current environment, potentially leading to irrational pricing and higher execution risks.
The sector has also demonstrated increased thrust on artificial intelligence investments. Tata Consultancy Services announced its entry into the sovereign data centre space with an initial 1GW capacity, while HCL Tech disclosed its 'Advanced AI' revenue. Several other players are enhancing their AI-driven solutions to strengthen service offerings and secure new deals.
Q3 Outlook and Long-term Concerns
The ongoing December quarter is typically slow for IT companies due to seasonal factors including employee holidays and fewer working days. Many IT company managements expect the impact of furloughs on revenue growth to be similar to the previous year. Additionally, the impact of wage hikes on margins of select technology companies will be closely monitored, making Q3 likely to be a dull quarter overall.
The broader concern stems from a swift deterioration in the global macroeconomic scenario due to tariff-led uncertainties since the beginning of calendar year 2025, which has led to earnings downgrades for the sector. This has kept stocks under pressure, with valuations cooling off significantly. The Nifty IT index has declined 16% in 2025 so far, contrasting with positive returns by the benchmark Nifty50.
Looking further ahead, Kotak is projecting 4.6-5.3% revenue growth for top three tier-1 IT companies in FY27, which is lower than normalized growth levels. The firm cautions that another weak year in FY27 could cement the perception—however inaccurate—that IT services face structural headwinds rather than cyclical challenges.
As the industry navigates these complex dynamics, the balance between cost optimization and growth investments, coupled with strategic positioning in emerging technologies like AI, will likely determine which companies emerge stronger when the eventual recovery takes hold.
