Indian Tier-2 IT firms outperform larger peers with stronger guidance

According to a Nuvama report, India's Tier-2 IT firms are outperforming Tier-1 counterparts with stronger FY27 guidance. Larger firms remain cautious due to global macro issues and Gen AI, while mid-cap players find growth pockets.

Tier-2 IT companies of India continued to outperform larger peers and issued stronger FY27 guidance, even as major Indian IT firms remained cautious due to global macroeconomic challenges, according to a report by Nuvama.

Tier-2 Outperforms Amid Cautious Outlook

"While Tier-1 companies continue to be impacted by cannibalisation of legacy revenue streams by Gen AI and weak global macro, Tier-2 companies have been able to find pockets of growth and mitigate the impacts to a large extent. We expect this trend to continue and the markets to accordingly reward Tier-2 players with higher valuations than Tier-1," the report stated.

The report said the mid-cap IT segment maintained its momentum in Q4FY26. "FY27 guidance for most Tier-1 companies was modest, while Tier-2 players continued to outperform and out-guide peers," the report added.

Deal Wins and Macroeconomic Pressures

According to the report, growth was supported by healthy deal wins and AI-led transformation programmes. However, "conversion timelines for these deals remained stretched due to macro uncertainty."

Among large-cap IT firms, companies largely sustained momentum despite the impact of furloughs and a cautious global business environment. These firms depended on cost optimisation and vendor consolidation to protect margins.

"Most Tier-1 IT companies provided soft FY27 outlook, reflecting no significant acceleration in FY27 over FY26--perhaps burdened by the continued impact of weak macro, tariffs and Gen AI, with incremental headwinds from the Gulf war," the report noted.

Sector-Wise Performance

Sector-wise, demand trends remained mixed during the quarter. The BFSI segment stayed healthy despite some furlough impact, while retail remained stable. Healthcare recorded strong growth momentum, but manufacturing continued to remain weak due to tariff-related uncertainty.

The report added that deal wins remained healthy across both large-cap and mid-cap companies. Global peers also maintained spending guidance on cloud and automation.

Market Reaction and Investment Outlook

According to the report, IT stocks are currently reacting more to global AI developments than company-specific fundamentals. It noted that this market behaviour resembles earlier technology cycles seen in 2016-17.

"After the recent sharp correction, we find valuations highly attractive. Reverse DCF also indicates extremely low terminal growth assumptions. We remain positive on the sector from a medium to long-term perspective--in the near term, expect volatility to persist," the report said.

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