Indian IT: Signs of a Turnaround After Q3 Performance?
The Indian IT sector, a $283 billion industry, is showing promising signs of recovery after a period of sluggish growth. The Q3 FY26 earnings reports from major IT services companies have exceeded expectations, sparking hopes that the worst may be over. While it may be too early to dismiss the impact of global uncertainties and the ever-growing influence of AI, revenue trends, guidance, and management commentaries suggest that "green shoots" are emerging.
Key Q3 Highlights
Several top Indian IT companies have reported their Q3 FY26 earnings, revealing a mixed bag of results. While most firms experienced a decline in profits due to one-time charges related to the implementation of new labor codes, there were also positive indicators:
- Revenue Growth: Several companies, including Infosys and HCLTech, reported substantial revenue growth. Infosys saw an 8.9% YoY increase in consolidated revenue, reaching ₹45,479 crore. HCLTech's revenue rose by 13.3% YoY to ₹33,872 crore.
- Deal Wins: Tech Mahindra reported a positive surprise with significant deal wins. Infosys secured new deals worth $4.8 billion, and HCLTech achieved a multi-quarter high in contract bookings at $3 billion.
- Guidance Revision: Infosys has increased its revenue growth estimates for FY26 to 3-3.5% in constant currency, compared to the earlier estimate of 2-3%. HCLTech upgraded its services revenue guidance to 4.75-5.25%.
- AI-Driven Growth: Companies reported continued momentum in artificial intelligence services. TCS reported that AI and data-related revenues drove topline growth, with AI revenues growing 17% quarter-on-quarter.
The Impact of New Labor Codes
The implementation of new labor codes had a significant impact on the earnings of major IT companies. These regulations, which consolidate 29 existing labor laws, have led to a structural shift in how companies calculate employee benefits. This resulted in a combined one-time charge of approximately ₹5,400 crore for the top six IT firms. TCS, for example, faced the highest impact, with a ₹2,128 crore charge. Despite the profit declines, companies have shown operational resilience with strong revenue growth and healthy AI-driven demand.
Cautious Optimism
Experts suggest that the IT sector is moving from uncertainty toward gradual stabilization. Despite discretionary spending not picking up significantly, growth resilience and margin performance have been strong. Some analysts believe that the worst could be behind, citing improved client confidence, particularly in digital and AI-led transformation.
However, challenges remain. The Indian IT industry is still facing headwinds such as global macroeconomic uncertainties, cautious client spending, and the ongoing need to adapt to emerging technologies like AI. Additionally, there are concerns about margin pressures from regulatory changes, increasing hiring costs, and the need to bridge skill gaps in areas like AI and machine learning.
Looking Ahead
The Indian IT sector appears to be on a path to recovery, driven by increased spending on technology and a surge in AI-focused deals. While the one-time impact of new labor codes has affected profitability, the underlying performance of these companies indicates resilience and adaptability. The focus on AI integration and improving deal quality suggests a measured recovery is in sight, despite ongoing global challenges. Companies that can successfully pivot to new technologies and service models will be best positioned to capitalize on future growth opportunities.
