IT companies are expected to see modest sequential revenue growth in Q2 FY26. The second quarter is usually strong, but as of now, IT investors are driving through the fog. Tariff-induced uncertainties hindered the revenue growth of technology companies in Q1 FY26. Cut to now, the demand environment, although not deteriorating, remains uncertain. Clients are still cautious about the use of discretionary technology spending. Additionally, the recent hike in the H-1B visa fee and the proposed Halting International Relocation of Employment (HIRE) Bill have fuelled concerns about rising protectionism in the US—a key market for IT companies. Rising protectionism could lead to higher operating costs and increased competition for Indian IT companies.
Tata Consultancy Services (TCS) will kick-start the Q2 FY26 earnings season for the sector, with its results to be declared on 9 October. “We expect revenue growth for our coverage at 1.2% sequential constant currency (cc) (+0.5% year-on-year cc). However, quarter-on-quarter growth in Q2FY26 will likely be the second lowest in a Q2 in the past five years,” said Jefferies India on 30 September.
But there could be some bright spots. Infosys is expected to benefit from higher financial services and inorganic contributions, while LTIMindtree could gain from the ramp-up of large deals. Additionally, all major currencies have appreciated against the US dollar in the second quarter. So, Jefferies expects aggregate dollar revenue to grow by 1.6% sequentially—40 basis points higher than cc growth. Further, IT firms with higher exposure to Europe (such as Infosys, HCL Technologies, Tech Mahindra and Coforge) will have higher forex tailwinds in Q2FY26.
The sector’s Ebit margin is expected to see a stable-to-improving trend sequentially, backed by a weak Indian rupee, lower visa costs, and cost optimization measures. Ebit is earnings before interest and tax. Hiring is likely to be muted. That said, meaningful margin gains are expected to be limited ahead due to pricing pressure, changes in delivery models, and the GenAI transition. Wage revisions for FY26, if any, would be a focus area.
Deal flows are likely to remain decent despite a volatile demand environment, but led by cost-optimization projects. “TCS, Infosys and HCL have all announced large deals during the quarter. However, these include significant renewal portions,” said Kotak Institutional Equities report dated 1 October. Furthermore, net new deals for companies have primarily resulted from shifts in wallet share between service providers, rather than incremental technology budgets, according to the report. The problem is that these deals tend to be fiercely competed for, which could result in significant pricing pressure.
Tier-II IT companies are expected to continue outperforming their tier-I competitors in revenue growth. Vertical-wise, the BFSI recovery is expected to continue in Q2, although weakness in manufacturing and retail is likely to persist. Management commentary on demand trends, confidence about H2 growth uptick, and furlough (as Q3 is seasonally weak) are important to gauge the outlook. Whether Infosys and HCL revise their FY26 revenue growth and margin targets is another monitorable.
Following recent adverse developments in the US, the Nifty IT index has declined 22%, significantly lagging behind the benchmark index, Nifty 50, which has returned 5%. Underperformance is unlikely to reverse unless earnings see upgrades, which seems elusive for now. “We project revenue growth for the Indian IT sector at 2.8% for FY26E, lower versus FY25,” said HDFC Securities on 3 October. HDFC has cut earnings per share estimates by 1/1.2% for FY26/27. The Nifty IT index is trading at a one-year forward price-to-earnings of 21x, according to Bloomberg data. With downside risks aplenty, this valuation multiple is hardly a selling point.
