ICICI Securities has identified select midcap IT stocks, including Coforge Ltd, Mphasis Ltd, and Persistent Systems Ltd, as preferred investment options. This recommendation comes as the brokerage anticipates significant revenue headwinds for larger IT players, exacerbated by AI-led productivity gains and shifting client budgets.
Large-Cap IT Faces Growth Challenges
The majority of large-cap IT companies are expected to see their FY27 revenue growth undershoot FY26 figures. ICICI Securities notes that three out of five major companies had already cut their full-year guidance by June 2026. This trend is compounded by a persistent disconnect between total contract value (TCV) from deals and actual revenue conversion, with year-on-year deal TCV growth slowing for half of the companies under the brokerage's coverage in Q1FY27. A further slowdown in deal TCV growth could pose a downside risk to FY28 revenue projections.
Impact of AI and Shifting Budgets
A primary driver of these headwinds is the accelerating adoption of agentic AI. ICICI Securities' research indicates that AI-led productivity gains are materially compressing turnaround times and reducing human effort across various service lines, with some IT companies reporting 50-60 percent productivity improvements over three to five-year deal tenures. This trend has sharpened considerably in recent months.
Furthermore, incremental technology budgets are increasingly shifting towards AI-native and cloud providers. This is reflected in robust revenue growth among AI infrastructure, cloud, and SaaS players. Gartner data supports this, projecting the share of IT services to decline to 25 percent in CY26 from a historical average of 27-28 percent. While bank technology spending rose 8 percent year-on-year in H1CY26, BFSI IT services revenue grew only 4 percent, indicating that IT services firms are capturing a smaller portion of client technology budgets.
Why Midcaps Are Preferred
ICICI Securities favors midcap companies like Mphasis, Coforge, and Persistent Systems, along with Tech Mahindra among large-caps, due to their stronger revenue growth visibility. This visibility is supported by consistent, healthy large-deal wins. These midcap firms have also demonstrated superior performance in improving revenue per employee and gross margins over FY24 through June 2026, alongside increasing market share gains in incremental organic revenue. While AI revenue is growing healthily for IT companies, it is not yet sufficient to offset the decline in non-AI revenue, making the competitive landscape challenging for many.