IT cos eye CY26 rebound as AI demand outweighs Q3 weakness: Motilal Oswal

Motilal Oswal on IT sector: Seasonal furloughs and wage hikes are set to keep the December quarter muted for Indian IT companies, but markets are likely to look through near-term noise and focus instead on early signals from CY26 client budgets and the evolving artificial intelligence (AI) spending cycle, according to a Motilal Oswal report ahead of Q3FY26 results.

      

After a modest recovery in Q2 on low expectations, Motilal Oswal expects December quarter (Q3) to revert to typical seasonal softness, with furloughs weighing on growth across large IT services firms. However, the brokerage believes investor attention will increasingly shift toward commentary on demand visibility, deal pipelines and client budgeting trends for calendar year 2026.

 

 

Growth to stay subdued in Q3

 

Motilal Oswal expects large-cap IT companies to post sequential constant-currency (cc) revenue growth of just 0.3 per cent to 2.3 per cent in Q3FY26, while mid-caps are seen outperforming, with growth ranging from a decline of 2.5 per cent to an increase of 3.5 per cent. On an aggregate basis, revenue across the brokerage’s coverage universe is estimated to rise 7.7 per cent year-on-year, with Ebit and PAT growth of 7.2 per cent and 7.6 per cent, respectively, in rupee terms.

 

The demand environment remains cautious amid macro uncertainty, tariff-related risks and a transition toward a new technology cycle. Motilal Oswal notes that clients are still hesitant to commit incremental spending to large transformation programmes, keeping demand “steady at best” until planning cycles reset and budgets firm up around January 2026.

 

Vertical trends mixed

 

Sector-wise, BFSI is expected to remain relatively resilient despite furlough-related disruptions. Hi-Tech demand is likely to stay flat, as several large deals remain in transition. Travel and transportation should benefit from ongoing deal ramp-ups, while manufacturing presents a mixed picture, auto-related spending is under pressure, though core industrials remain steady. Engineering R&D services are expected to stay stable in Q3, with recovery skewed toward the March quarter.

 

At the company level, Motilal Oswal expects Infosys and TCS to post modest growth of 0.3 per cent and 0.5 per cent Q-o-Q cc, respectively, reflecting seasonal headwinds. HCLTech is projected to outperform large-cap peers with around 2.3 per cent Q-o-Q cc growth, aided by seasonality in its software business. Wipro is seen delivering about 1.5 per cent growth, supported by inorganic contributions from Harman. Tech Mahindra and LTIMindtree are expected to post around 0.5 per cent and 2.2 per cent growth, respectively, the latter aided by large-deal ramp-ups.

 

Among mid-caps, Persistent Systems is expected to lead with about 3.5 per cent Q-o-Q cc growth, while Coforge and Mphasis are seen delivering 3.0 per cent and 1.3 per cent, respectively. Hexaware Technologies may see a sequential decline due to lower licence revenues and furloughs. 

 

Margins under pressure

 

Margins are likely to face pressure in Q3 due to wage hikes and furloughs. Motilal Oswal expects TCS and Wipro to report sequential margin declines, while Infosys’ margins may remain flat as cost savings are offset by higher investments. HCLTech and Tech Mahindra are expected to see some margin expansion, supported by cost optimisation and project execution improvements. Among mid-caps, Coforge and Hexaware could see margin compression of 60–70 basis points. 

 

AI cycle key to CY26 outlook

 

Looking beyond Q3, Motilal Oswal believes enterprises are gradually moving from AI pilots to more scaled deployments, which should support deal pipeline stability and improve total contract values over time. IT companies are also stepping up investments in AI-led capabilities through acquisitions and partnerships, positioning themselves for the next phase of demand.

 

The brokerage expects AI services demand to meaningfully improve from mid-2026, as hardware-led AI capex moderates and spending shifts toward software, platforms and services. CY26 is seen as the bottom of the growth cycle, setting the stage for a stronger acceleration in the following years.

 

Motilal Oswal top bets

 

Motilal Oswal’s top picks in the IT sector remain Infosys and Tech Mahindra among large-caps, and Coforge and Hexaware Technologies in the mid-cap space. The brokerage prefers Infosys for its discretionary-heavy mix and positioning in enterprise-wide AI spending, while it sees execution improvements and transformation under way at Tech Mahindra. Among mid-caps, Coforge’s strong order book and Hexaware’s gains from vendor consolidation underpin the positive view.

 

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