Selective discretionary spending, wage hikes to shape IT Q3: Sushovan Nayak

As the December-quarter earnings season for the IT sector gets underway, investor attention is firmly on large-cap names such as TCS, HCL Tech and LTIMindtree, with the Street bracing for a seasonally softer quarter on revenues but closely tracking deal momentum, margins and the evolving AI narrative.

For TCS, expectations are largely steady rather than spectacular. The company is likely to report flat to marginally positive revenue growth, reflecting the broader demand environment and the impact of furloughs typical of the December quarter. As Sushovan Nayak from Anand Rathi Institutional pointed out, “this will be slightly flat to marginally positive revenues, 0.5% to 0.6% CC growth is what we are expecting, and margins to be marginally impacted by the wage hikes because last quarter it was just one month of wage hike and this quarter it will be for the complete quarter.”

While margins may remain under some pressure due to the full-quarter impact of wage hikes, the focus is expected to shift to the deal pipeline. Historically, the second half of the fiscal year tends to see higher deal renewals and new decision-making by clients. “Generally, if you look at Q3 and Q4, that is when most of the deals start getting renewed and most of the customers take decisions as far as new deals are concerned. So, you will see seasonally strong TCVs as far as TCS and most of the other large-cap IT pack is concerned,” Nayak said in an interview to ET Now.

On client ramp-ups, discretionary spending remains selective rather than broad-based. According to Nayak, whatever recovery is visible is largely confined to specific pockets. “Basis discussions and channel checks with the companies, what we understand is whatever discretionary spend that is coming back, it is primarily in high-tech to an extent and BFSI. As far as TCS is concerned, primarily the ramp-ups, if they happen, would happen in the BSNL account.”

HCL Tech, meanwhile, continues to stand out as an outperformer within the large-cap IT universe. The company had earlier indicated that certain deals were right-shifted, setting the stage for a stronger second half. That trend is expected to play out in Q3 as well, aided by the seasonally strong HCL Software business. “Possibly we expect somewhere around 2% constant currency growth for the company,” Nayak said, while cautioning that margins could face pressure due to wage hikes and restructuring expenses.

Despite near-term margin headwinds, confidence remains intact on HCL Tech’s relative performance. “HCL Tech has always grown better than the sector, and we believe that this will continue to be the case… even this quarter,” Nayak noted. He added that LTIMindtree is likely to remain the fastest-growing among the large players, with Q4 expected to be stronger than Q3 due to deal ramp-ups.
Beyond headline numbers, markets are expected to closely track commentary around AI, cloud and deal execution. While AI revenues have been a talking point, the way companies disclose them may evolve. Nayak highlighted that while HCL Tech had earlier quantified AI revenues at around 3% of its topline, global peers are rethinking such disclosures. “Accenture has always been disclosing those Gen-AI revenues… but what Accenture is doing now is that, going forward, they will not be disclosing their Gen-AI revenues because they have said that Gen-AI is infused into every deal that they are now getting into.” This, he said, is likely to be true for Indian IT companies as well, as AI becomes embedded across services rather than remaining a standalone revenue line.Currency movements are another variable in focus this quarter. The rupee’s depreciation of nearly 2% versus the previous quarter is expected to offer some support, particularly to companies with higher US exposure. “Generally, every 100 bps of rupee depreciation results in 30 to 40 bps positive impact as far as the margins are concerned,” Nayak explained. However, this benefit may be largely offset by wage hikes across both large-cap and mid-cap players, limiting the scope for any meaningful margin expansion.

Overall, the Q3 earnings season for IT is shaping up to be one of resilience rather than acceleration — with steady revenues, cautious margins and deal momentum, AI integration and management commentary likely to drive stock-specific reactions more than headline growth numbers.