No festive spark for IT in Q2; macro headwinds weigh on growth

Bengaluru: India's IT services sector is unlikely to post strong results for the September 2025 quarter.

While Q2 is typically the best-performing quarter, Investec expects divergent results across companies as macroeconomic uncertainty, tariff risks, and client caution continue to affect discretionary spending. Both brokerages — Kotak Institutional Equities and Motilal Oswal Financial Services — expect modest sequential growth for Tier-I players in the quarter, while mid-tier firms are set to outperform. Kotak estimates revenue growth for Tier-I companies will range between 0.2% and 2%, with Infosys expected to lead at 2% quarter-on-quarter growth, followed by HCLTech at 1.7%. TCS and Wipro are forecast to trail, reporting around 0.2% growth each.

Motilal Oswal projects similar trends, with Infosys likely to post 2.4% sequential growth, HCLTech at 1.7%, TCS at 1%, Wipro at 0.3%, Tech Mahindra at 1%, and LTIMindtree at 2%. Mid-tier companies, however, are expected to deliver stronger momentum. Kotak sees Coforge leading with 6% growth, followed by Persistent Systems at 4%. Motilal Oswal also highlights Coforge at 6%, Persistent at 3.7%, and Hexaware at 3.3% as strong performers, aided by ramp-ups of large cost-saving and consolidation deals. According to Investec, the September quarter is expected to show divergent performances across IT majors. Infosys, HCLTech, and Tech Mahindra are likely to deliver relatively stronger growth (in that order), while TCS and Wipro may report weaker results.

Among tier-2 firms, Persistent, LTIMindtree, and Mphasis are expected to lead growth, with Zensar, LTTS, and KPIT facing headwinds — particularly from softness in the auto, manufacturing, and technology, media, and telecom (TMT) segments. Margins are expected to remain steady, supported by rupee depreciation, but analysts caution that pricing pressures, wage costs, and the deflationary impact of generative AI (GenAI) will limit gains.

"GenAI is currently deflationary to the extent of 2–3%, especially in coding, summarisation, and contact-centre BPO," Kotak noted, adding that its long-term impact on IT budgets remains uncertain. Across verticals, the BFSI segment is expected to remain resilient, while auto and retail continue to face headwinds from tariffs and margin pressures. Engineering, research and development (ER&D) firms are likely to post another soft quarter, particularly those exposed to automotive clients, though a pick-up is expected in the second half as delayed projects resume.

Kotak has trimmed its FY26–FY28 earnings estimates by up to 3% and fair values by 2–9%, while Motilal Oswal believes a meaningful acceleration is unlikely until the next tech spending cycle, which could be 15–18 months away. Both brokerages hold differing views on guidance. Motilal Oswal expects HCLTech, Infosys, and LTTS to maintain their guidance, while Kotak believes HCLTech will retain its revenue guidance, but Infosys could raise it from 1–3% to 2–3%. Wipro is also expected to review its guidance this quarter, Kotak said.

Investec has forecast EBIT margins to improve for most companies in Q2FY26, aided by a roughly 2% depreciation in the rupee. However, Wipro and Mphasis may see limited benefit due to hedge adjustments and transition costs on large deals. Margins, however, are expected to remain range-bound for most companies.

"We expect margins to remain range-bound and supply-side pressures to stay muted; however, meaningful margin gains are limited ahead as they are being impacted by multiple fronts, including pricing, change in delivery models, client behaviour, and the GenAI transition," Motilal Oswal said in its report. Infosys may see a 40-basis-point improvement from realisation gains. HCLTech's EBIT margin may improve by 50 basis points despite restructuring and GenAI investments. Tech Mahindra and LTIMindtree are expected to post 50–60 basis-point margin gains on cost optimisation and a better offshore mix. Coforge's EBIT margin could rise to 14%, up 80 basis points as ESOP costs taper. On the demand front, Investec said commentary is likely to remain largely unchanged, with continued caution around discretionary spending. Extended furloughs, timing of wage hikes, and rising onsite wage inflation remain key factors to watch, even as deal wins continue to be strong through the quarter.