Incremental gains, stable demand may drive growth for India's IT sector

India's IT sector is showing signs of stabilising demand, improving deal momentum and rising AI-led productivity, with analysts turning modestly positive on earnings as firms regain confidence

Demand trends appear to be stable for the information technology (IT) sector, and headwinds may be easing. Most deals are still focussed on cost optimisation.

 

Artificial intelligence (AI) adoption and penetration may be accelerating.

 

Analysts are increasing earnings estimates by modest amounts and pointing at a sector as a possible hedge against rupee depreciation.

 

Almost every listed IT company has seen quarter-on-quarter (Q-o-Q) growth in Q2FY26 over Q1FY26 with many beating consensus estimates for margins and growth. 

 

Financial services did well with the Big Five witnessing average growth of over 6.2 per cent. Several firms have hiked guidance, or lifted the upper end of the growth band.

 

Commentary is cautious, with Infosys and HCLTech guiding 2–3 per cent and 3–5 per cent revenue growth for FY26, respectively. 

 

But this marks a change from several quarters of guidance downgrades from many firms and two-three years of slow demand.

 

Mid-tier companies outperformed their larger peers on revenue growth, and margins were healthy across the sector.

 

Valuations have declined to a point where free cash flows (FCFs) and dividend yield look good after deratings for the last two-three years. However, macro uncertainty remains and there’s no clear recovery in discretionary spending yet.

 

Deal total contract value (TCV) is steady, driven by AI, cost takeouts, and vendor consolidation deals.

 

IT firms acknowledge significant productivity gains from adoption of GenAI across various service-lines, including software development, managed services and business process outsourcing (BPO).

 

The productivity increases start off slow, but accelerate as corporates learn to build internal tools, frameworks and platforms that leverage GenAI. 

 

Many projects have moved from pilot to full implementation. But Indian IT firms are still trying to position themselves in the space.

 

There could be revenue headwinds for the IT services industry in the next phase of AI adoption though cost savings will offset this to greater or lesser extent.

 

HCLTech has partnered OpenAI to provide implementation services to clients.

 

It reported $100 million revenue from advanced AI in Q2FY26, but it’s the only Indian IT company to quantify revenue from AI.

 

Cognizant (CTSH) sees AI as a route for share gains from clients and is bullish on agents and agentic AI. It has partnered Anthropic.

 

Persistent showcases its SASVA platform as a differentiator. Infosys has its Topaz suite of AI services coupled with full-stack app services capacity.

 

In the macro environment, there is now some clarity on US tariffs and verticals such as retail, manufacturing, logistics and life sciences are under less pressure.

 

Companies expect minimal H-1B visa impact, aided by increased local hiring.

 

Discretionary spending is reasonable in banking, financial services and insurance (BFSI) and in utilities due to power demand from data centres. It’s weak in multiple verticals like telecom, retail, automotive, hi-tech, energy and healthcare.

 

Clients continue to be cost and efficiency focused. Tech budgets have been gradually shifting away from services to Cloud and software along with GenAI which implies some hardware also in the spending mix. Uncertainties will persist, and that would mean caution.

 

Modest earnings per share (EPS) gains are likely Y-o-Y through FY27 and FY28 with mid-tier firms like Mphasis, LTIMindTree, Persistent and Coforge outperforming big ones.

 

The Nifty IT services index is down 12 per cent Y-o-Y against 10 per cent gain in the Nifty-100 for the last 12 months.

 

But the sector has delivered around 15 per cent of the profits of the Nifty whereas its weight in the benchmark index is at a decadal low of 10 per cent.

 

The Q2FY26 earnings season was marked by more earnings beats, led by largecaps and midcaps.

 

The results indicate a steady but cautious demand environment for IT firms with some macro pressures and soft discretionary spends.

 

But the trend of guidance cuts has been reversed.