Motilal Oswal has released its preview for the upcoming third quarter IT results season, highlighting four key stock picks while projecting seasonal headwinds to impact sector growth. The brokerage expects seasonal furloughs to weigh on Q3 performance after some respite witnessed in Q2 on beaten-down expectations.

Growth Projections and Market Outlook

The brokerage has provided specific growth forecasts for the upcoming quarter, with distinct expectations for large cap and midcap segments.

Motilal Oswal believes markets will look beyond Q3 seasonality and focus on signals around the demand environment from client budgeting for calendar year 2026. The firm notes that amid macro-tariff uncertainty and a new tech cycle, clients remain cautious on committing incremental spending to large programmes.

Long-term Growth Cycle Expectations

The brokerage expects demand to remain steady, at best marginally incremental, until January 2026 as planning cycles reset and budgets firm up. Calendar year 2026 should represent the bottoming of the growth cycle, setting the stage for more meaningful acceleration in the second half of FY27 and FY28 as AI services move into scaled deployment.

Early signs of AI strategy formation are emerging with IT companies investing in AI-led capabilities via acquisitions and partnerships. Motilal Oswal expects momentum to build over the next six months, with AI services demand inflecting into calendar year 2026.

Top Stock Picks and Company-Specific Forecasts

Motilal Oswal has identified four preferred stocks across large cap and midcap segments, with detailed Q3 expectations for each company.

Large Cap Preferences

Infosys: Revenue growth may remain flat in constant currency terms due to seasonal furloughs, with H2 expected to be weaker than H1. US BFSI segment may remain resilient, while operating margins are projected to stay flat. Management is likely to maintain its guidance.

Tech Mahindra: Sequential revenue growth of 0.5% in constant currency terms is expected as furloughs partially impact growth. Margins may improve by 60 basis points with Europe picking up traction again.

Midcap Selections

Coforge: The company is expected to deliver 3% sequential growth in constant currency revenue despite furlough impacts. EBIT margin may decline by 70 basis points due to wage hikes, partially offset by lower ESOPs and other expenses.

Hexaware Tech: Constant currency revenue may decline 2.5% sequentially due to lower license revenue, regular furloughs, fewer working days, and government shutdown in the US. The CyberSolve acquisition will have a two-month impact in Q3.

Additional Company Outlook

Motilal Oswal has also provided forecasts for other major IT players:

Analyst Sentiment Overview

The brokerage's top picks have received varied analyst coverage across the investment community:

The Q3 results season will provide crucial insights into client spending patterns and demand environment signals that could shape the sector's trajectory through calendar year 2026 and beyond.

Indian IT companies are positioning for a potential sector comeback in 2026, driven by a dramatic transformation in their artificial intelligence approach and strategic acquisitions worth billions of dollars. Recent developments suggest the sector may finally demonstrate meaningful progress in AI integration, potentially triggering a broader market recovery.

Dramatic AI Focus Transformation

A comprehensive analysis of earnings call transcripts reveals the extent of this transformation across major Indian IT firms, with some companies showing exponential growth in AI-focused discussions over a two-year period.

The transformation is particularly striking for Infosys, which increased AI references from just 4 times in October 2023 to 111 times in October 2025. HCLTech showed similar momentum, jumping from 13 mentions to 130 mentions over the same period, as management discussed building AI-platform revenue streams and leveraging AI as a productivity engine.

Strategic AI Acquisitions Signal Sector Pivot

The sector's strategic transformation extends beyond rhetoric to substantial financial commitments, with recent acquisitions totaling $3 billion demonstrating serious intent to capture AI market opportunities.

Coforge's acquisition of US-based AI firm Encora represents the most significant deal, with management projecting the combined entity will generate $2 billion in revenue by FY27. TCS's $700 million acquisition of Coastal Cloud demonstrates focus on specialized AI capabilities in multicloud Salesforce consulting.

Market Recovery Indicators

Two significant developments in the IT space suggest positive momentum building for 2026. The sector's AI transformation coincides with broader market dynamics, as the Nifty IT index recovered 12.50% in the final quarter, following earlier underperformance compared to global technology indices.

Analysts believe that if IT stocks make a meaningful comeback, the broader Nifty could benefit significantly, given the sector's substantial weightage in the index. The timing of AI integration efforts aligns with increased investor confidence in the sector's strategic repositioning.

Expert Analysis on Sector Outlook

Market analysts view this transformation as a necessary evolution for Indian IT firms. Ravi Menon, IT Services Analyst at Macquarie Capital, suggests enterprises will increasingly choose to build rather than buy AI capabilities due to unique requirements.

"I do believe that enterprises this time will choose to build rather than buy because each company will have its own unique use of AI. That's how I think people will try to differentiate," Menon explained. He expects larger firms like TCS to pursue programmatic acquisitions while midcap companies focus on smaller, strategic deals.

Prashanth Kaddi, Partner at Deloitte India, remains optimistic about continued deal activity, noting that acquisitions of AI services firms globally provide access to both client bases and AI solutions for existing customers.

Strategic Transformation Impact

The data reveals AI has evolved from a peripheral topic to a central theme woven throughout discussions of deal wins, productivity improvements, pricing strategies, and margin enhancement. This represents a fundamental shift from the sector's traditional reliance on scale and labor arbitrage toward AI-integrated service delivery models.

Analysts have identified 9 key stocks to monitor as the sector navigates this transformation, though success will depend on how effectively these companies integrate AI capabilities into their core business models and demonstrate tangible value to clients seeking AI-powered solutions.