Indian midcap IT faces near-term hurdles, better H2FY27 ahead: Study

India's midcap IT services sector faces muted FY27 revenue growth due to AI-led deflation and deal delays. Brokerage Anand Rathi remains "cautiously positive," expecting improved deal conversion and operating leverage in the second half of the year.

India's midcap IT services sector could see improved deal conversion and operating leverage in the second half of FY27, but revenue growth is likely to remain muted through the year as AI-led deflation, geopolitical disruptions and delayed deal ramp-ups weigh on near-term performance, according to brokerage firm Anand Rathi Shares and Stock Brokers.

Anand Rathi remains "cautiously positive" on the sector, with execution-focused midcap IT companies expected to benefit from vendor consolidation and cost-take-out deals. However, tech-focused midcaps could face pressure as hyperscalers prioritise cost savings amid large AI and data-centre capital expenditure.

Weak Q1FY27 Performance

The brokerage said Q1FY27 was a weak quarter, with median year-on-year constant-currency revenue growth for midcap IT services companies moderating to around 2.1 per cent from 3.8 per cent in Q4FY26. Median margins also declined to 14.7 per cent from 15.9 per cent, despite a 3.3 per cent sequential depreciation in the rupee. Delayed deal ramp-ups, foreign exchange and hedging losses, proactive hiring ahead of demand and company-specific investments contributed to the margin pressure.

Company-Specific Deal Momentum

Deal momentum, however, remained resilient among select companies. Persistent emerged as the strongest growth performer, reporting 16.5 per cent year-on-year constant-currency growth, supported by client mining and a USD 650 million-plus mega deal. Its total contract value rose 120 per cent year-on-year. Mphasis delivered its fifth consecutive quarter of more than USD 400 million in TCV, while Mastek's order backlog increased 13.3 per cent.

Performance Across Verticals

The brokerage said BFSI remained a relatively consistent growth engine, while the Middle East and some discretionary spending segments remained weak amid geopolitical disruptions. Auto-focused ER&D was particularly affected, with KPIT's revenue declining 3.6 per cent sequentially as European OEM weakness and programme delays weighed on performance. BPO remained comparatively resilient, led by Firstsource, which reported 12.3 per cent year-on-year constant-currency growth and maintained its FY27 revenue growth guidance of 10-13 per cent.

Long-Term AI Opportunities

Anand Rathi said structural AI opportunities should support the sector over the longer term, including AI deployment and integration, legacy modernisation, data optimisation, agentic lifecycle management, token optimisation, small language model deployment and sovereign AI. The brokerage expects enterprise software to monetise these opportunities first through FY27, while services could benefit more meaningfully as deployment scales into FY28.

Outlook and Key Monitorables

It expects UK exposure to remain a structural compounder, while execution and deal conversion will be key monitorables for the sector in H2FY27.

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