India's midcap IT services firms face a cautious year ahead, with Anand Rathi projecting better deal execution and operational leverage after a weak first half, even as AI-related deflation and external disruptions weigh on full-year revenue growth.
- Midcap IT Q1FY27 revenues grew 2.1% YoY, down from 3.8% in Q4FY26
- AI-led deflation and deal delays weigh on margins and near-term growth
- Select firms like Persistent and Mphasis show strong deal momentum
What happened
Anand Rathi reports a subdued first quarter for India midcap IT services companies, with median constant-currency revenue growth slowing to 2.1% year-on-year from 3.8% in the previous quarter. Margins also declined from 15.9% to 14.7%, impacted by foreign exchange pressures, early hiring ahead of demand, and company-specific investments.
Despite these headwinds, some companies demonstrated resilience. Persistent posted a 16.5% revenue growth supported by a $650 million mega deal, while Mphasis maintained strong consistent contract wins exceeding $400 million in total contract value. Meanwhile, sectors like BFSI remain growth drivers, whereas areas like Middle East discretionary spending and European auto-related ER&D face challenges.
Why it matters
The sector's muted revenue growth and margin compression highlight the near-term impact of AI-driven pricing deflation, geopolitical disruptions, and slowed deal ramp-ups. These factors suggest cautious optimism is warranted rather than broad sector strength for FY27.
Long-term structural opportunities enabled by AI—such as legacy modernization, data optimization, and token-efficient models—offer a growth runway beyond FY27. Early monetization is expected in enterprise software, with IT services poised to benefit as AI deployments scale up in FY28 and beyond.
What to watch next
Monitoring deal execution and conversion in the second half of FY27 will be critical to assessing recovery momentum. Vendor consolidation and cost take-outs could provide tailwinds for execution-focused midcap IT firms.
Geopolitical developments, especially in the Middle East and Europe, along with AI investment cycles at hyperscalers, will influence sector performance. Additionally, the evolving adoption of AI tools and solutions across Indian IT service providers remains a key factor for future growth potential.