June quarter tougher for larger IT firms; mid-tier firms had a better run

Bengaluru: The June quarter (Q1FY26) earnings of Indian IT services companies show slow revenue growth amid market uncertainty. Though Infosys posted its best quarter performance, with revenue from operations at Rs 42,279 crore - growth of 7.5% year-on-year (YoY), the overall IT industry saw a subdued quarter.

Kapil Joshi, CEO, IT Staffing, Quess Corp, said, “In our view, Q1 FY26 was clearly tougher for the larger IT companies. Growth slowed to 3% for most, and margins remained tight.”

“While BFSI (banking, financial services and insurance) and telecom held up fairly well, we saw weaker demand from sectors like pharma, auto, and manufacturing. Clients in those areas were more cautious with new tech spends. On the other hand, mid-sized or tier-2 IT firms had a much better run. They were quicker to respond, more agile in deal execution, and many of them reported 15-20% growth. We also noticed a clear uptick in subcontracting, companies are trying to stay lean and manage their benches better,” Joshi added.

TCS posted a 1.3%  YoY growth in revenues at Rs 63,437 crore and sequentially, its revenue declined 1.6%. During the June quarter earnings conference, the company’s CEO and MD  K Krithivasan said the trend of seeing a delay in decision making continued and intensified in the June quarter.

“Global businesses were disrupted due to conflicts, economic uncertainties and supply chain issues. We saw cost pressures in our customers causing previously unseen project pauses, deferrals and decision delays that resulted in less than expected revenue conversion,” he said.

As far as verticals are concerned, BFSI (Banking, Financial Services and Insurance) clients are cautious with tech investments.

Krithivasan said, “The softness that we had called out earlier in US insurance continued throughout the quarter. However, we are seeing insurance doing well in Europe. BFS continues to remain cautious in Europe and the UK. We believe the current caution in BFS is temporary as there’s a lot of unmet demand.”

Attrition rate inching up

In the past few quarters, IT companies are again witnessing an increase in attrition rates. TCS’ attrition in IT services was at 13.8% at the end of Q1, up 50 bps sequentially. Infosys’ attrition rate was at 14.4% in Q1, up from 12.7% in the year-ago period.

When asked about increasing attrition rate, Joshi of Quess Corp said there is no one reason, but a few clear trends.

“Companies are trimming their bench to boost utilisation, and at the same time, people with strong skills in AI, cloud, and cybersecurity are in high demand. They’re getting good offers and are moving. Attrition has gone up, somewhere between 12% and 18%, depending on the company. Larger firms are still adjusting their workforce models, while tier-2 players seem to be managing better with tighter project staffing and more automation. It’s less about headcount now, and more about keeping the right skill sets,” he added.

Wage hike in IT industry

Though TCS recently announced a wage hike for 80% of its employees, salary increments are still a concern in the IT industry as many top and mid-tier companies are yet to declare a wage hike. Infosys rolled out wage hikes in two phases- January and April this year. Recently, Jatin Dalal, Chief Financial Officer, Cognizant during an earnings conference call, said they have not yet taken a decision on salary increase. “Our endeavour is to cover a vast majority of our employees during the second half of this year as and when we decide,” he added.

Every year, a majority of techies get hikes between 4% and 8% and only top performance receive double-digit hikes.

Joshi said, this quarter, wage hikes were handled very cautiously. Larger companies were clearly trying to protect margins, so increments were either delayed or quite limited. “Some even saw margins drop to around 16.3%, partly due to salary hikes and also increased investment in AI tools. Subcontracting played a role in managing fixed costs. That said, tier-2 firms managed this phase more smoothly. They balanced moderate hikes with strong use of automation, and that helped maintain productivity. On average, margins across the industry rose slightly to about 18.5%, but margin pressure is still a concern, especially with AI-related expenses going up,” he said.

Going forward, according to analysts, the environment is still uncertain and the IT industry will face many headwinds, especially with tariff-related issues. Joshi said they don’t expect a major recovery in the second half of the year. “Most companies are shifting their focus to cost optimisation, vendor consolidation, and driving more from AI. In this kind of market, the companies that are agile, efficient, and can quickly adapt to client needs, especially the mid-sized ones, will likely handle the headwinds better,” he said.