AI momentum, margins in focus as IT firms enter Q3 earnings

Indian IT firms are all set to kick off their Q3 earnings season from the second week of January. Traditionally, the October-December period of any financial year is considered a lean period for the sector as key markets such as the US and Europe witness a high number of holidays due to Christmas and the New Year.

Higher furloughs (number of holidays) result in fewer working days, lower project execution, and consequently, muted earnings.

While the seasonal trend remains intact, the current financial year is marked by several external factors that could significantly influence the earnings of IT firms. First, the pace of artificial intelligence (AI) adoption and project wins in this space is likely to create divergent outcomes across companies.

Second, pricing pressure has intensified as generative AI tools improve efficiency across the spectrum. Industry reports suggest pricing cuts in the range of 20-30 per cent. As AI adoption cannibalises revenues from existing projects, operating margins will be a key metric to watch this quarter.

Third, currency movement may offer some relief. The rupee has depreciated nearly 5 per cent against the US dollar in 2025, with around 1.5 per cent of that decline occurring during the December quarter.

This is expected to provide some forex-related margin support in Q3. Overall, however, the earnings season is unlikely to delivery major fireworks.

Brokerage firms expect revenue growth of IT firms to remain tepid. Motilal Oswal, in a recent report, said large IT companies are likely to report constant currency growth of 0.3-2.3 percent in the December quarter.

Mid-tier IT firms are expected to outperform their larger peers once again, with slightly higher revenue growth. That said, some IT companies may see contraction in their revenue growth figures during this period, indicating performance variation among companies. Meanwhile, brokerages have once again begun factoring in a recovery in the second half of FY27.

Similar expectations were expressed last year, which turned out to be untrue, suggesting such forecasts should be treated with caution.

The reasons are many. Currently, multiple variable are at play. Trade uncertainties stemming from Trump tariff policies continue to weigh on global technology. The ongoing geopolitical conflicts in Europe and South America have further compounded the challenges.

At the same time, generative AI is driving a fundamental shift in the outsourcing business model. With so many moving parts, pinpointing the timing of a sustained recovery remains. However, one silver lining is that AI-led disruption appears to be stabilising.

The Q2FY26 earnings of Indian IT firms showed signs of revenue stability, raising hopes that Q3 could build on that momentum.

Indian IT firms have also been aggressively pivoting towards AI through acquisitions and strategic realignments. As a result, management commentary on AI adoption, deal pipelines, and evolving business models is likely to be watched more closely than the revenue and profit numbers this earnings seasons.