IT sector staring at likely tepid revenue growth in Q1FY26

Mid-tier firms expected to perform better than their bigger peers.

Despite the macroeconomic uncertainty arising from Trump’s tariff war and geopolitical tensions, Indian IT services companies are likely to post a steady set of first quarter numbers. According to industry experts and brokerage firms, not many project ramp downs and cancellation happened in the April-June quarter. Rather, several new project wins were announced towards the end of first quarter. Revenue growth rate, however, is expected to remain tepid for most large firms, though mid-tier IT pack will post better growth rates than their larger peers.

“In Q1FY26, we expect large companies to report flat to slightly positive growth (in the range of 0-1% quarter-on-quarter or QoQ). This is better than what was feared post Liberation Day and may herald the bottoming out of  the earnings cycle. Growth for the sector has been low single digits in the past two years (FY24 & FY25), owing to a high base, GCC expansion, GenAI ambiguity and above all weak or uncertain macro (aspects). FY26 is likely weak as well due to tariff impact,” HSBC Research wrote in a report.

With unexciting revenue growth in Q1, most large firms will stick to their growth forecast for FY26. Both Infosys and HCL Tech are unlikely to change their annual guidance owing to the uncertain demand environment.

“There is not much change in the demand environment. It is not going down but demand is also not witnessing any visible improvement. Overall, revenue growth rate is likely to be in single-digit. As recent Accenture’s results have indicated, BFSI is doing good, while consumer facing industries are seeing tepid demand. All eyes will be on the deal pipeline of Indian IT firms, as Accenture has seen a dip in deal flow. If the deal pipeline of Indian IT firms remains healthy, it will show that Indian IT firms are gaining market share,” Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting told DH. 

If the order book remains sound, it will indicate that despite generative AI (GenAI) impacting deal sizes, Indian IT companies are maintaining deal momentum, he added.

Margins to stay healthy

Operating margins of most Indian IT firms – both large and mid-tier- are likely to remain healthy during the first quarter. The biggest factor supplementing margin profile is the depreciation of rupee against the dollar.

“We expect margins to be range-bound and supply-side pressures to remain muted; however, meaningful margin gains are restricted by low growth, visa costs and pressure from a strong INR vs USD,” Motilal Oswal said in a report.

“We expect TCS EBIT margins to remain flat QoQ, with some pressure from talent investments and constrained operating leverage. HCL Tech’s margin may decline 50 basis points QoQ, in line with the typical Q1 software seasonality reset, similar to prior years. Infosys may see a dip of 10 basis points due to wage hikes for senior pyramid levels and ramp-up of large deals,” the report added.

Headcount addition

Headcount addition will be on the radar of industry watchers as GenAI is automating several tasks in a project. Already, several technology firms in the US are laying off people as GenAI tools make many job roles redundant. According to HR industry sources, the total headcount of many firms would remain at the same level as that in the quarter ended-March.

“Overall, headcount addition has remained tepid in the June quarter. Though tech layoffs in the US have not touched India yet, new additions are happening only on a replacement basis. It has to be seen how fresher hiring has been done during the quarter,” said an industry source.

Notably, the IT biggies have given their fresher hiring target for FY26, which is not very different from last fiscal year. If fresher hiring progresses as planned, it will show that the impact of GenAI on entry-level jobs is not that adverse yet.

Mid-tier IT firms to lead

Mid-tier IT firms will again lead the show, posting higher revenue growth than their larger peers. “Growth is likely to remain strong for mid-tier, and we expect growing focus on cash flows by investors for mid-tier now,” HSBC said in the report.

“Among mid-tier firms, we expect Coforge to lead the pack with around 7% (constant currency) QoQ revenue growth, driven by strong organic momentum and steady ramp-up of the Sabre deal, along with contributions from recent acquisitions,” Motilal Oswal said in the report.

However, growth within mid-tier firms will be uneven with some facing roadblocks in the form of deal ramp downs and cancellations. “Ramp downs are happening in the market place. And there is no timeline for recovery in the discretionary spend. So, commentary on demand environment, and deal pipeline will be keenly watched by the investors,’ said Jain of Pareekh Consulting.  

(The writer is a Bengaluru-based
senior journalist)