Mid-cap companies are projected to outperform their large-cap counterparts in FY25 as they quickly adopt emerging technologies and capture market share in niche sectors. Analyst estimates suggest that tier-1 companies, or large-caps, are expected to witness revenue growth of 0.9-3 per cent q-o-q, while mid-caps are expected to grow by 2.1-4.5 per cent.
“Over the past seven years, mid-cap IT companies (median revenue growth of 11.4 per cent) have outpaced large caps (8.1 per cent) by 330 bps. This is because of the former’s increased agility in adopting emerging technologies and their specialisation in particular services. This focus allows them to capture market share in these niche areas faster than their large-cap peers, often offering a broader range of services,” said a report by domestic brokerage Prabhudas Lilladher.
It noted that this focus has also helped mid-cap companies perform better even during periods of macroeconomic uncertainty. In FY24, large-cap companies reported a y-o-y median revenue growth of just 2 per cent, while mid-cap companies reported 7.2 per cent.
According to the report, as macro recovery gathers pace and spending sentiment improves, mid and small-cap IT outsourcing providers continue to benefit from the niche expertise developed within key verticals, along with execution agility and flexibility, participation in vendor consolidation, and winning disproportionately over large caps. Additionally, enterprise deal sizes are becoming more fragmented, benefiting mid-caps as opposed to the one-shot large mega deals awarded to a single large vendor to de-risk vendor dependency.
“For Tier-1 companies, we expect margins to remain flattish to 110 bps expansion on a sequential basis, while the same for tier-2 companies should be in the wider range of -180 to 260 bps q-o-q, due to wage hike and M&As,” said a report by Emkay Global Financial Services, adding that select mid-cap companies may outgrow large-caps.
A Motilal Oswal report observed that mid-tier companies could continue to perform well, especially those with strong offerings in “pre-GenAI” spending, such as data engineering. The aggregate revenue, EBIT, and PAT are anticipated to grow by 3.2 per cent, 5.2 per cent, and 6.1 per cent respectively (INR terms) y-o-y.
For tier-I companies, revenue growth is expected to be in the range of flat to +3.0 per cent q-o-q CC. Revenue growth for tier-II players is expected to be between flat and +4.5 per cent q-o-q CC. Mid-tier companies, especially those with strong offerings in data engineering and ERP modernization, will continue to do well, with their growth outperformance likely to be sustained over the medium term, another Motilal report indicated.
“The near-term macro uncertainties and no meaningful sign of recovery in discretionary IT spending are key concerns for large-cap names. However, we expect mid-tier players to continue their outperformance.”