The October-December quarter (Q3FY26) presents a challenging landscape for Indian IT companies, with seasonal factors creating headwinds for revenue growth across the sector. Furloughs, year-end holidays, and client shutdowns typically characterize this period as seasonally weak for IT services providers. While large IT firms face muted growth expectations, midcap companies are positioned to deliver relatively stronger performance during this quarter.

Growth Projections Show Mixed Performance

According to a CNBC-TV18 poll, growth expectations vary significantly across company sizes and segments. The data reveals a clear distinction between largecap and midcap performance expectations for the quarter.

HCLTech is expected to lead among largecap companies with nearly 3% growth, primarily driven by strength in its products business. Other large IT companies are projected to post low single-digit growth, reflecting the typical seasonal impact on their operations.

Market Conditions and Demand Environment

The current demand environment remains stable but subdued, with specific trends shaping client spending patterns. Cost optimization deals continue to dominate the landscape, while discretionary spending remains weak across client segments. JPMorgan has identified some improvement in auto technology spending, though large-scale artificial intelligence (AI) monetization remains limited.

For FY26, guidance is expected to narrow within existing ranges rather than see upgrades. Margins are likely to remain range-bound despite potential support from a weaker rupee, indicating continued pressure on profitability metrics.

Market Performance and Valuations

The Nifty IT Index demonstrated resilience with approximately 14% growth during the October-December quarter. However, the index remains down nearly 12% over the past year, reflecting broader market challenges facing the sector.

Valuation metrics show divergent trends between company segments:

Expert Outlook and Investment Perspective

Yogesh Agarwal, Head of Research at HSBC India, emphasized the seasonal nature of the current quarter's challenges. "This quarter is usually a seasonally weak quarter, and therefore it's not going to have a significant impact on the numbers or the outlook. However, we do expect a little bit of positive commentary from the management," Agarwal stated.

Regarding investment opportunities, Agarwal highlighted the growth differential between company sizes. "Larger companies probably can grow mid-single digits, while smaller companies at their scale can grow faster, and that's where investors could see more value from a long-term compounding perspective," he explained.

The analysis suggests that while Q3FY26 presents seasonal headwinds for the entire IT sector, midcap companies are better positioned to navigate these challenges and deliver superior growth rates compared to their larger counterparts.

IDBI Capital has maintained a positive medium-to-long-term outlook for the IT sector despite expectations of near-term softness in Q3 performance. The brokerage firm's stance comes as major IT companies including TCS, Infosys, and Tech Mahindra prepare for what appears to be a challenging quarter.

Sector Outlook and Key Drivers

Despite the anticipated Q3 softness, IDBI Capital remains bullish on the sector's prospects, particularly for mid-tier IT companies. The firm has identified several key factors that support their positive outlook for the medium to long term.

AI Initiatives and Deal Pipeline Strength

The brokerage firm has highlighted two primary drivers for their optimistic stance on the IT sector. Enterprise-wide scaling of AI initiatives represents a significant growth opportunity, as companies across various industries continue to invest in artificial intelligence capabilities. Additionally, robust deal pipelines suggest sustained business momentum despite near-term challenges.

Market Positioning

While major IT players face immediate headwinds, the sector's fundamental strength appears to remain intact. The combination of technological advancement through AI adoption and strong business development activities provides a foundation for future growth beyond the current quarter's expected softness.