Mid-sized information technology companies are poised to outperform their larger peers in the second quarter of FY27, even as the sector navigates a confluence of headwinds including geopolitical tensions, macroeconomic softness, and anxieties around generative artificial intelligence, according to a report by brokerage Nuvama.

Demand Holds, Sentiment Slips

Overall demand conditions remained broadly stable through the quarter, the brokerage noted, though business sentiment visibly weakened in September as geopolitical conditions — particularly developments linked to the Gulf region — deteriorated. Nuvama expects management teams across IT companies to flag concerns about global geopolitical risks, a sluggish macroeconomic backdrop, and the evolving influence of Gen-AI during the upcoming earnings season.

These factors have collectively weighed on investor sentiment toward the sector in recent months. The IT index has declined approximately 26% over the past nine months, reflecting unease over platform-led Gen-AI disruption and Gulf-related uncertainties.

Why Nuvama Stays Constructive on IT Services

Despite the near-term turbulence, Nuvama has maintained a constructive outlook on the IT services industry. The brokerage argues that advances in Gen-AI are more likely to generate fresh opportunities than to hollow out the sector's core business model. 'We continue to believe the IT Services model is here to stay and the Gen-AI disruption would only lead to bigger opportunities for them,' Nuvama said in its report.

This framing runs counter to the bear case that has pressured IT valuations — namely, that AI-native platforms will disintermediate traditional IT service delivery. Nuvama's position is that transformation mandates driven by AI will, in fact, expand the addressable work for services firms.

Margins, Guidance and Currency Assumptions

The report anticipates margin improvement across most IT companies, underpinned by operational efficiencies and ongoing cost-management initiatives. While some companies may revise revenue guidance during the earnings cycle, Nuvama expects margin guidance to remain broadly unchanged.

Notably, the brokerage has revised its USD/INR assumption upward to 95 from 93, reflecting a weaker rupee outlook. It has also rolled forward its valuation framework using average FY28–FY29 price-to-earnings multiples, signalling a longer investment horizon in its assessment.

Outlook: Near-Term Caution, Medium-Term Optimism

Nuvama cautioned that near-term volatility could persist, but affirmed a positive medium-to-long-term view on IT services, citing resilient underlying demand trends and expanding opportunities tied to AI-driven transformation programmes. The divergence between mid-cap and large-cap IT performance, if it materialises, would mark a continuation of a pattern seen earlier in FY27, where smaller, more nimble IT firms gained share in select verticals. The Q2 FY27 earnings season, beginning later this month, will be a key test of that thesis.