IT Firms Face Slow Q3FY26 Growth, Tier II Players to Outperform

India’s IT services sector is heading into the Q3FY26 earnings season with modest growth expectations but resilient fundamentals. According to a Centrum report, revenue growth for IT firms is likely to remain muted in the December quarter, even as margins hold firm, supported by currency tailwinds and ongoing efficiency measures.

Growth during the quarter is expected to be incremental, driven by steady demand in select verticals such as Banking, Financial Services and Insurance (BFSI) and Technology, along with the gradual ramp-up of recently signed deals. However, the overall demand environment remains unchanged, keeping topline expansion subdued.

The report expects tier II IT companies to outperform their larger peers, with tier I firms likely to post quarter-on-quarter dollar revenue growth in the narrow range of 0.2% to 1.7%. The divergence reflects better agility and deal execution among mid-sized players.

Currency movements are expected to provide partial relief. The Indian rupee depreciated around 2.1% against the US dollar during the quarter, supporting reported revenue growth in rupee terms. However, cross-currency headwinds of 20–40 basis points may offset some of these gains.

On margins, the outlook remains steady. While Q3 is seasonally weak due to furloughs and fewer working days—leading to lower utilisation—the currency benefit is expected to cushion operating performance. Companies are also doubling down on cost-control levers, including optimising subcontracting, improving employee pyramid structures, and boosting utilisation.

At the same time, IT firms continue to invest in new-age technologies. The growing adoption of AI tools is expected to enhance productivity and improve revenue per employee, helping offset slower revenue growth.

The focus this quarter remains firmly on execution, converting deal wins into revenue and protecting margins in a still-cautious demand environment.