Can midcap IT outperform large-cap peers this earnings season?

With the start of the Q1 earnings season, market analysts have charted a tough road ahead for the overall Indian IT sector, due to sticky structural headwinds and muted performance expectations in financial results.

However, the key focus of investors now shifts towards midcap and larger midcap IT companies, which can potentially balance execution and AI-backed advancement more quickly than larger firms in the industry to deliver growth.

Meanwhile, India’s largest IT services company, TCS, followed by the third-largest IT firm, HCLTech, reported steady earnings for the April–June quarter, largely in line with market expectations.

The management of both companies also expressed optimism around demand improvement in the September quarter.

Experts believe the recent rally in midcap IT stocks follows a sharper correction than that seen in large-cap IT names. They expect midcap IT companies to deliver a stronger Q1 performance than their larger peers, supported by better growth prospects and relatively resilient demand.

Growth tailwinds for midcap IT firms

Larger midcap IT companies are expected to be in a "sweet spot" as the market shifts its focus to execution, with firms striking a balance between technology investments, service delivery, and disciplined spending.

Independent capital markets analyst Ambareesh Baliga explained that while large IT companies may have deeper pockets, they may not be very swift in the execution of their plans.

Hence, this gives opportunities to larger midcap companies that are at the sweet spot with decently deep pockets and also on their ability to execute quicker in terms of embracing AI than their larger peers.

“I think the sweet spot will be the larger midcap IT companies because it's quite clear that the industry needs to embrace AI. The key question now is how quickly companies can execute. That requires two things—deep pockets and the ability to move swiftly,” Baliga said.

He added that larger midcap IT firms may not have the same financial muscle as their larger peers, but they have sufficient resources and a key advantage: greater agility. “They have reasonably deep pockets, and what works in their favour is that they can execute much faster,” the market expert added.

Several company-specific developments have also strengthened the outlook for the midcap players. These include Zensar Technologies' record order book of $912.7 million, Coforge's AI-native push through the acquisition of Encora, and Persistent Systems' strategic collaboration with global AI leader Nvidia.

A key growth tailwind for midcap IT companies is the ramp-up in AI-native and cloud modernisation deals. Analysts believe midcap firms are winning a disproportionate share of such contracts, aided by their organisational agility, which enables faster integration of generative AI into delivery workflows.

Harshal Dasani, Business Head, INVAsset PMS, said, “Midcap IT companies had corrected disproportionately harder than large-caps over the last three months, so short positioning was more extended and mean-reversion snaps become sharper on any positive catalyst.”

The expert also said that the deal-book strength across the mid-cap universe is driving fund flow rotation.

Creator-to-user bridge

Baliga also highlighted that Indian IT companies have the potential to act as a bridge between AI creators and end users. While much of the AI innovation is taking place in foreign markets, India's large user base positions its IT firms to play a key role in deploying and scaling these technologies.

“These midcap companies are positioned in a way that they're acting quicker and are likely to be better placed. But the impact of the same will be felt not immediately but over the upcoming three to four quarters when the cost factor reduces for the IT companies,” said the expert.

Key risks ahead

Continued macroeconomic uncertainty, pricing pressures, cost optimisation initiatives, layoff risks, and a still-fragile demand environment are among the key factors likely to weigh on the financial performance of IT companies in the coming quarters.

Dasani, for instance, opined that continued macroeconomic uncertainty, along with slower discretionary spending from clients, is likely to weigh on the IT sector.

Although so far, the large-cap IT companies' managements have hinted at improvement in the demand trajectory from the second quarter of the current fiscal year, the risk of an extended period of disruption can further impact performance.

On the cost front, Baliga pointed to cost optimisation as a key focus area for IT companies, warning that it could lead to a higher risk of job cuts across the industry.

“From an employee perspective, there’s a need for significant reskilling to remain relevant. But if you look at IT companies four or five years from now, they are likely to have much leaner workforces than they do today while targeting similar levels of topline revenue,” Baliga said.

This move also poses the risk of a drop in revenues, but with overall volumes rising over time, the market expects the risk to pan out eventually.

Near-term expectations

The market expects midcap IT companies to deliver stronger constant-currency growth in the April–June (Q1 FY27) quarter, supported by deal ramp-ups and market share gains.

“The midcap IT universe is expected to deliver visibly better constant-currency growth than the large-cap majors in Q1 FY27, driven by deal ramp-ups and market share wins,” said Harshal Dasani.

Dasani expects midcap IT companies to post 2%–4% sequential constant-currency growth, compared with flat to marginally negative growth for the large-cap IT players.

Key monitorables

Key focus of investors will also remain on FY27 revenue guidance revisions, AI-native deal book velocity, and BFSI vertical resilience.

“From an investor's perspective, I think opportunities are there in the larger midcap ones,” said Baliga, emphasising that the key focus will remain on management commentary of these IT companies.

In the near term, Baliga said the quarterly numbers themselves are unlikely to be the primary driver for IT stocks. Instead, the expert believes investors will closely track management commentary for cues on demand, deal momentum, and the outlook for the rest of the fiscal year.

“The results themselves won't matter as much. What will be more important is the management commentary,” Baliga said, adding that any positive commentary on business prospects or demand recovery could act as a key catalyst for the company's stock performance.

List of prominent midcap IT stocks

*Note: All data related to the current market price, 5-day returns, 1-month returns, and YTD returns have been collected from the NSE website.