Artificial intelligence (AI) seemed to have emerged as both the promise and the constraint for India’s top IT services firms, with third-quarter earnings (Q3 FY26) from Tata Consultancy Services (TCS) and HCLTech indicating that while AI-led activity is accelerating, its ability to drive broad-based revenue growth remains uneven.
TCS, India’s largest IT services firm, used productivity gains and operational discipline to preserve margins despite muted growth, while HCLTech translated rising AI-linked spending into industry-leading sequential revenue growth, supported by strong deal wins and improved visibility.
The contrasting outcomes point to a sector where enterprise technology budgets are being selectively redeployed rather than broadly expanded, with clients prioritising AI infrastructure, data and engineering work even as traditional discretionary spending stays cautious.
TCS: AI Traction Rises, But Demand Recovery Lags
TCS reported a 0.8 per cent quarter-on-quarter (QoQ) increase in revenue in constant currency terms, slightly ahead of expectations, while operating margins held steady at 25.2 per cent.
“TCS reported +0.8 per cent QoQ revenue growth in CC terms, ahead of our expectation of 0.6 per cent CC, while operating margins remained stable at 25.2 per cent, supported by productivity gains and operational efficiencies,” said HDFC Securities.
The brokerage spotlighted that AI-led revenue scaled to an annualised run rate of USD 1.8 billion, growing 17.3 per cent sequentially, as clients moved from pilots to outcome-linked deployments.
“Enterprises are transitioning from AI pilot programs to ROI-driven deployment,” said HDFC Securities, adding that decision-making cycles had shortened as spending commitments became more visible.
However, several brokerages cautioned that revenue growth remained narrow.
“Demand momentum is picking up pace; yet to reflect in revenue momentum,” said ICICI Securities’ Ruchi Mukhija, noting that international growth was weighed down by seasonal furloughs.
Deal wins of USD 9.3 billion, while supportive of near-term visibility, fell below the company’s recent average run-rate.
“Deal momentum was reasonable… but a clear demand upturn is still not visible, with growth coming from select pockets rather than broad discretionary recovery,” said Motilal Oswal Financial Services.
Motilal Oswal added that margins remained resilient even after wage hikes.
“Operating margins beat expectations, holding flat at 25.2 per cent QoQ despite wage hikes and higher SG&A,” it said, attributing the performance to productivity gains and improved revenue per employee.
Elara Capital struck a more guarded tone, warning that AI growth alone may not be enough.
“TCS’s AI revenues witnessed higher traction, growing in mid-teens for two quarters, but non-AI revenue continued to be soft,” said Elara in its note, adding that attrition could keep cost pressures elevated in the near term.
Axis Securities said the company was seeing early signs of improvement but flagged macro risks.
“The management sees green shoots in international markets in FY26 and expects it to be better than FY25,” said Axis Securities, adding that near-term growth remained constrained by global economic uncertainty.
“TCS FY26 is likely to be a ‘stability + margin defense + AI repositioning’ year,” said Gaurav Vasu, CEO and Founder at UnearthInsight, adding that the key question was how quickly AI deals convert into durable revenue, particularly in North America.
Gartner echoed that view, pointing to execution discipline. “TCS’s latest results highlight the company’s resilience and disciplined execution amid a challenging macroeconomic environment,” said Shubham Rathore, Principal Analyst at Gartner, adding that enterprises are prioritising scalable, business-ready AI solutions.
HCLTech: AI-linked Spending Lifts Growth, Scrutiny Shifts To Sustainability
HCLTech delivered a stronger quarter, posting 4.2 per cent sequential revenue growth in constant currency terms, beating consensus expectations.
“HCL Tech delivered a strong Q3FY26 revenue growth of 4.2 per cent QoQ CC, which surpassed expectations,” said HDFC Securities, citing broad-based strength across IT services, software products and engineering R&D.
Deal wins rose to USD 3 billion, up 17 per cent sequentially and 44 per cent year-on-year (YoY), including a USD 473 million mega deal with a global apparel retailer.
Motilal Oswal Financial Services said the company remained the fastest-growing large-cap IT services firm.
“We expect HCLTech to deliver a CAGR of 6.7 per cent in USD revenue over FY25-28,” said Motilal Oswal, adding that annual contract values had reached a four-year high, supporting near-term visibility.
HCLTech management raised FY26 services revenue growth guidance to 4.75-5.25 per cent in constant currency terms, while retaining EBIT margin guidance of 17-18 per cent.
“A significant shift is occurring as clients prioritize ‘day minus one’ investments, such as AI Factory infrastructure and custom silicon engineering,” said HDFC Securities.
Axis Securities upgraded the stock to “buy”, citing confidence in long-term scalability.
“We believe HCLTech is well-positioned for sustained long-term growth, supported by its multiple long-term contracts with leading global brands,” said Axis.
Yet not all brokerages shared the optimism.
“Despite strong Q3, HCLTech cut the upper end of its guidance by 50bps, indicating weak Q4,” said Elara Capital, adding that growth in the products business was driven by tactical licence revenues rather than recurring subscriptions.
Elara downgraded the stock to “sell”, citing margin pressure from higher AI skill costs and valuations that had moved ahead of fundamentals.
ICICI Securities took a more neutral stance. “HCLTech reported a strong quarter on all fronts and is participating well in AI-led discretionary demand uptick,” said Ruchi Mukhija, while maintaining a “hold” rating due to valuation concerns.
Gartner’s Rathore said HCLTech’s results showed strong execution.
“HCLTech’s Q3 performance stands out, with revenue up 6 per cent QoQ and EBIT margins improving to 18.6 per cent,” he said, adding that strong deal wins and cash conversion positioned the company well for sustained momentum.
Sector In Transition
Across both companies, analysts said AI spending is increasingly focused on infrastructure, data and engineering rather than rapid application-layer monetisation.
“Client conversations on AI have shifted toward enterprise-wide adoption, but implementation is slow as clients address data, cloud, and process constraints,” said Motilal Oswal.
For investors, the earnings season has clarified that India’s IT recovery will not be linear.
While companies such as HCLTech are benefiting from early AI-linked spending cycles, others like TCS are prioritising margin defence and positioning for a broader recovery that analysts increasingly expect to materialise only in FY27. |
