Is the frenzy around artificial-intelligence finally waning for the Indian IT sector? According to brokerage firm Anand Rathi Research, India’s mid-cap IT sector, which had a weak start to FY27 may show some recovery in the second half of FY27 due to AI-led opportunities.

“We continue to remain structurally positive on IT & expect enterprise software to monetise first through FY27; Services follow as deployment scales into FY28,” Anand Rathi noted.

AI creates both opportunities and pressure

AI is opening new opportunities in deployment and integration, legacy modernisation, data optimisation, agentic operations, token optimisation and sovereign AI. Anand Rathi expects enterprise software to benefit from AI monetisation first in FY27, while IT services could see stronger benefits as deployments scale in FY28.

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Anand Rathi noted that the sector is also moving towards outcome-based pricing models, where vendors charge for business outcomes rather than hours or manpower. This could help companies capture part of the productivity gains created by AI.

AI deflation keeps pressure on IT revenue growth

However, the pressure of AI on the tech sector is not totally gone. The brokerage firm believes that AI-led deflation compounded by geo-political impact may lead to “a muted revenue growth in FY2.”

“However, broader structural drivers, albeit back ended, remain intact with AI unlocking incremental work of deployment and integration of AI, legacy modernisation, data

optimization work needed to make enterprises AI ready, agentic lifecycle management, token optimisation & SLM deployment, agentic ops & the sovereign AI opportunity.” 

Strong deal wins support mid-cap IT recovery

Along with AI, healthy deal momentum for several mid-cap IT companies is the reason why Anand Rathis is positive on the mid-cap IT sector. “H2FY27 is expected to see better deal conversion and operating leverage, as execution remains the key monitorable,” Anand Rathi noted. 

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Looking at Q1FY27, Persistent emerged as the clear growth standout. Persistent’s TCV rose 120% year-on-year, Mphasis recorded its fifth consecutive quarter with TCV above $400 million, while Mastek’s order backlog grew 13.3% year-on-year.

Persistent remains top pick

Persistent Systems remains top pick of Anand Rathi as it stood out among its mid-cap IT peers. Anand Rathi has retained a Buy rating on Persistent with a target price of Rs 6,931. 

In Q1FY27, Persistent Systems’ revenue grew 16.5% year-on-year in constant currency and 4.1% sequentially.

The company’s TCV jumped 120% year-on-year to $1.15 billion, while its last-12-month TCV rose 40.2% to $3.03 billion. The company also reported a healthy book-to-bill ratio of around 2.5 times.

A key contributor was a $650 million-plus, 6.5-year strategic services deal with an existing US technology customer. Persistent also added 1,138 employees during the quarter, which affected utilisation but could support growth as demand improves.

Mphasis sees strong AI-led pipeline

Mphasis is also on the ‘Buy’ rating list of Anand Rathi with a target price of Rs 2,981.

In its Q1FY27, Mphasis reported revenue of $471 million in Q1FY27, up 2.1% sequentially in constant currency. Management expects Q2 to deliver its strongest sequential constant-currency growth in three years, at 3% or higher.

The company recorded $461 million in net-new TCV, with around 63% of the TCV coming from AI-led deals. This marked the fifth consecutive quarter in which TCV crossed $400 million.

AI-led deals now account for around 70% of Mphasis’ pipeline, while its Tria platform is increasingly moving from discussions to actual client engagements.

Outlook: H2 recovery remains key

Anand Rathi remains cautiously positive on the mid-cap IT sector despite the weak Q1 performance. The brokerage expects deal conversion and operating leverage to improve in H2FY27.

However, AI-led productivity gains, geopolitical uncertainty and delayed project ramp-ups could keep revenue growth muted through FY27. The brokerage expects scaled and execution-focused companies to outperform, particularly as clients increasingly look for cost savings and vendors compete for consolidation and cost-take-out deals.

For investors, the key factors to watch, according to Anand Rathi, will be deal conversion, AI-led revenue growth, margin recovery and the pace of improvement in H2FY27.

Disclaimer: This article reports on equity research analysis, ratings, and target prices published by a registered brokerage firm for informational purposes only. It does not constitute financial advice, a personal recommendation, or an offer or solicitation to buy, sell, or hold any securities. Equity investments are subject to market risks, and investors should consult a SEBI-registered financial advisor before making any investment decisions.

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