Anand Rathi has expressed cautious optimism about the midcap IT services sector, noting that execution-focused companies may benefit from vendor consolidation and cost reduction initiatives. However, the brokerage warns that tech-centric midcaps could face headwinds as hyperscalers prioritize cost efficiency amid significant investments in AI and data centers.

The Q1FY27 results for midcap IT services companies were described as a weak quarter, with median year-on-year constant-currency revenue growth declining to 2.1% from 3.8% in Q4FY26. This moderation reflects broader challenges within the sector, including the impact of AI-driven deflation on pricing power and margin compression.

The slowdown in revenue growth during Q1FY27 underscores the challenges faced by midcap IT firms, particularly as they navigate a landscape marked by increased competition and cost pressures. The brokerage attributes this trend to the broader industry shift toward AI and automation, which is reshaping demand patterns and operational models across the sector.

In India, midcap IT firms are likely to experience heightened pressure as AI adoption accelerates, leading to deflationary trends that could affect pricing strategies and profitability. The Indian market, which is a significant hub for IT services, may see increased competition from hyperscalers and other large players leveraging AI to reduce costs and improve efficiency.

Looking ahead, the midcap IT sector may find opportunities in the second half of the year, driven by potential vendor consolidation and cost optimization efforts. However, the long-term outlook for FY27 remains uncertain, with AI-led deflation expected to continue exerting downward pressure on growth and margins across the industry.