Not just TCS: Q1 results destroy midcap IT's last standing heroes
midcap IT companies
is evaporating faster than their stock prices, as investors who fled largecap IT bellwethers for supposedly safer harbors discover there's nowhere to hide in the sector's brutal downturn. While
Tata Consultancy Services
(
TCS
) has grabbed headlines with its 12,000-employee layoff plan and share prices being down one-third from peak, the once high-flying midcap
IT stocks
, previously shielded by their growth engine reputation, are also nosediving.
The Q1
earnings
season proved to be a tough one for mid-tier IT companies, with most reporting topline misses that sent investors scrambling for the exits. Having lost about 10% in a week, Persistent shares are in bear grip and down about 24% from peak.
Coforge
shares have also lost about 7% of its value in the last one week alone.
Explore courses from Top Institutes in
Please select course:
Select a Course Category
Cybersecurity
Design Thinking
healthcare
Digital Marketing
Project Management
Technology
Management
Leadership
Product Management
Finance
MBA
MCA
Data Science
Healthcare
CXO
Data Science
Operations Management
Others
others
Data Analytics
Skills you'll gain:
Duration:
10 Months
MIT xPRO
CERT-MIT xPRO PGC in Cybersecurity
Starts on
undefined
Get Details
"
Q1 results
triggered a sharp stock correction for most of the mid-tier IT companies," said HSBC India's Yogesh Aggarwal. "Every company print was interesting, with some idiosyncratic take-away."
The grim reality: even companies posting what appeared to be decent numbers couldn't escape punishment.
Mphasis
"finally reported a sharp decline in its top logistic client" but somehow also delivered "strong growth and extremely strong deal wins".
Also Read |
Trent, TCS shares worst Nifty performers in 2025. Why 2 Tata stocks are down at least 25% this year
Live Events
Cash flow crisis?
Capital intensity is spiking across midcap IT as companies leverage their balance sheets to win fixed-price contracts. Coforge sits at the epicenter of this debate, with its free cash flow to revenue conversion averaging a mediocre 5% in recent quarters.
"Most companies are leveraging their balance sheets to offer better terms for fixed-price contracts," Aggarwal warned, highlighting how desperate the competition has become.
The cash conversion crisis isn't isolated to Coforge. Persistent has seen similar increases in contract assets leading to weaker cash conversion, while even Mphasis reported the troubling trend in Q1.
Also Read |
Explained: Why TCS firing 12,000 employees may be a canary in the mine and what it means for investors
What analysts say
Despite the carnage, some analysts are doubling down on beaten-down names. Jefferies upgraded Mphasis to BUY, arguing that "the key overhang in logistics vertical is behind" and raising their price target to Rs3,100 based on "an improving growth outlook."
For Coforge, Jefferies maintained its BUY rating with a raised price target of Rs2,030, expecting the company to deliver 23% EPS CAGR over FY26-28 despite current struggles.
But Vinit Bolinjkar, Head of Research at Ventura Securities, struck a more cautious tone: "The Q1 FY26 earnings season proved challenging for midcap
IT companies
in India, despite initial investor preference for them over large-cap IT firms."
The pain isn't just domestic. Weak discretionary spending as clients in the US and Europe delay IT projects amid trade and inflation uncertainties is crushing revenue conversion. "Deal pipelines remained robust, their conversion into revenue was slow, particularly impacting sectors like manufacturing, auto, and consumer packaged goods," Bolinjkar explained.
A notable trend this quarter was the role of cross-currency tailwinds, especially due to appreciation in currencies like the Euro and British Pound, which boosted reported USD revenue growth.
'However, this partly masked the underlying weakness in volume-led business. On the profitability front, operating margins came under pressure across most firms, driven by wage hikes, higher visa-related costs, and relatively soft topline growth. Despite this, some companies demonstrated effective cost control measures through higher utilization rates, reduced subcontracting, and disciplined hiring,' said noted Anil Rego, Founder & Fund Manager of Right Horizons PMS.
Valuation check
The sector's elevated valuations are becoming impossible to justify without an earnings upgrade cycle. "The Nifty IT index, encompassing many midcap firms, had surged significantly, trading at a premium to its long-term average," Bolinjkar observed. "Without a clear earnings upgrade cycle, these elevated valuations appear difficult to justify."
Even after recent corrections, some midcap IT stocks might still be considered stretched given the current growth outlook, a sobering assessment for investors who thought they'd found safety in the sector's supposed growth engines.
'The outlook for midcap IT in the next few months appears mixed, with potential for continued pressure but also some pockets of resilience. Q1 FY26 results indicate a subdued start for the Indian IT sector, a trend likely to persist for midcap players. Most IT firms are maintaining cautious guidance, with largecaps like Infosys revising its FY26 revenue growth guidance to a modest 1-3%, reflecting a challenging demand environment. The lack of clear guidance from some large players further underscores this cautiousness for midcap players,' Bolinjkar said.
However, most companies remain guarded in their short-term outlook but are optimistic about a recovery in H2FY26, as client budgets stabilize and deferred projects start ramping up.
The sector appears to be in a consolidation phase, with performance divergence expected to continue across players, Rego sums it up.
(
Disclaimer
: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Time of India
3 hours ago
- Time of India
NMC to spend Rs2,100cr on resurfacing 61 major roads
Nashik: The Nashik Municipal Corporation (NMC) has decided to undertake a Rs2,100 crore initiative to resurface as many as 61 major roads throughout the city. This large-scale infrastructure project is for the upcoming Kumbh Mela , which the city is set to host between 2026 and 2028. The road development will happen in three phases. The first phase will cover 23 major roads, including sections of Nashik's existing inner, middle, and outer ring roads. They are vital as they connect to national and state highways, particularly in the Panchavati, Nashik Road, and Nashik East divisions. The civic body also plans to widen some of these roads where possible. The second phase will see development of 29 roads, including the significant Shahi Marg. And the third phase will involve re-laying of nine roads. This extensive upgrade of the road network aims to significantly improve connectivity and infrastructure, preparing the city for the large number of devotees expected for the Kumbh Mela. Nashik is one of four cities that hosts Kumbh Mela every 12 years. The last Mela was held in 2015. "We will require around Rs373 crore for developing the road network by March 2026. The remaining amount will be required in phases during the next financial year," the official said. "The civic administration has prepared a Rs15,000-crore plan for the upcoming Simhastha Kumbh Mela and submitted it to state govt for approval. Of the total amount, the public works department has proposed Rs4,000 crore for road works, construction of nine bridges, and other works," the official added. During the recent meetings, chief minister Devendra Fadnavis instructed the NMC and other authorities concerned to undertake those works which will need around two years for completion. Accordingly, the NMC completed the tender process and finalised a private agency for the construction of sewage treatment plants, sewage pumping stations and diversion of sewage from the 22 nullahs towards nearby STPs. The total cost of these sewage management works is around Rs1,475 crore. The civic body also started the tender process for the construction of the five bridges and strengthening of the Gadge Maharaj bridge. Apart from the STPs and bridges, the NMC has also prioritised road works.
Indian Express
5 hours ago
- Indian Express
Delay in onboarding lateral hires due to market conditions, will honour offers, TCS tells Chief Labour Commissioner
Skipping an in-person meeting with the Chief Labour Commissioner (CLC) on the delay in onboarding lateral hires and its recent layoffs, IT services company Tata Consultancy Services (TCS) instead communicated via an email Friday that it will honour all the offer letters it has issued, and that such deferments are a common industry practice, depending on project timelines. On August 1, the Chief Labour Commissioner held a meeting to discuss the recent layoff of more than 12,000 TCS workers, and a delay by the company in onboarding over 600 lateral hires. The meeting was sought by the Nascent Information Technology Employees Senate (NITES), which represents workers in the IT services sector. While a representative from the union was present, TCS skipped the meeting, NITES said in a press statement. NITES said TCS in its email to the CLC outlined that deferment was temporary, owing to prevailing market conditions, that it was attempting to keep the delay as minimum as possible, and the positions the company had offered had not been withdrawn. It also added that NITES had no locus standi to intervene in the matter. While the company reiterated its intention to eventually honour the offers, it failed to provide any clear onboarding schedule, offer compensation for the delay, or propose any support mechanism for the affected employees, many of whom remain unemployed, financially strained, and emotionally distressed, NITES said in its statement. TCS did not respond to an immediate request for comment. Last month, TCS, India's largest IT services firm, undertook the first major layoff in the Indian IT sector, slashing 2 per cent of its global workforce — roughly 12,200 jobs. Framed as a push toward building a 'future-ready generation' through 'skilling and redeployment,' the move is, in effect, a sweeping cost-cutting exercise. The axe will fall hardest on mid- and senior-level employees, signalling a tough new chapter in the industry. TCS' decision is expected to create uncertainty in the Indian IT industry, with industry experts anticipating that other major firms may follow suit. The move signals a potential shift in workforce strategies, especially as companies increasingly turn to automation and cost optimisation. As one of the sector's largest employers, TCS' actions could set a precedent, prompting similar measures across the industry and raising concerns among employees about job security and long-term career stability. Soumyarendra Barik is Special Correspondent with The Indian Express and reports on the intersection of technology, policy and society. With over five years of newsroom experience, he has reported on issues of gig workers' rights, privacy, India's prevalent digital divide and a range of other policy interventions that impact big tech companies. He once also tailed a food delivery worker for over 12 hours to quantify the amount of money they make, and the pain they go through while doing so. In his free time, he likes to nerd about watches, Formula 1 and football. ... Read More
The Print
7 hours ago
- The Print
Markets extend losses on global sell-off amid US tariff concerns; Sensex tanks 586 points
As many as 2,712 stocks declined while 1,306 advanced and 151 remained unchanged on the BSE. Besides, persistent selling by foreign investors added to the gloom, according to experts. In a volatile trade, the 30-share BSE Sensex tumbled 585.67 points or 0.72 per cent to settle at 80,599.91. During the day, it dropped 690.01 points or 0.84 per cent to 80,495.57. Mumbai, Aug 1 (PTI) Equity benchmark indices Sensex and Nifty declined sharply for the second straight session on Friday, tracking deep losses in pharma, metal, and IT stocks amid trade-related concerns and widespread selling pressure in global markets. The 50-share NSE Nifty declined 203 points or 0.82 per cent to 24,565.35. 'The benchmark index Nifty wrapped up its fifth consecutive week in the red — its longest losing streak since August 2023, raising eyebrows across the street…Despite making multiple attempts to scale up, the index has struggled to hold ground, only to be met with selling pressure each time. The long upper wicks are a telling story — bulls tried, but bears had the final say,' Sudeep Shah, Head – Technical Research and Derivatives at SBI Securities, said. On the weekly front, the BSE benchmark tanked 863.18 points or 1.05 per cent, and the Nifty dropped 271.65 points or 1.09 per cent. 'The Indian equity market extended its decline for a second day, pressured by renewed tariff threats and punitive duties that could undermine India's global trade competitiveness. Investor sentiment weakened further as FIIs now hold the second-highest net short position in derivatives, reflecting elevated caution. 'Globally, markets turned negative amid rising US inflation and trade tensions. While the sell-off was broad-based, FMCG stocks emerged as a defensive play, supported by attractive valuations, resilient demand, and relative immunity to external trade disruptions,' Vinod Nair, Head of Research, Geojit Investments Limited, said. US President Donald Trump unveiled sweeping new tariffs on dozens of countries, including 25 per cent duties for goods from India, marking a new era of American protectionism that triggered fresh tensions and concerns over a much wider disruption in the global trade landscape. From the Sensex firms, Sun Pharma tumbled 4.43 per cent after the company reported a 20 per cent year-on-year decline in consolidated net profit to Rs 2,279 crore for the first quarter ended June 30, 2025. Tata Steel, Maruti, Tata Motors, Infosys, Bharti Airtel and Tech Mahindra were also among the laggards. However, Trent, Asian Paints, Hindustan Unilever, ITC, Kotak Mahindra Bank, and Reliance Industries were the gainers. The BSE smallcap gauge dropped 1.59 per cent, and the midcap index declined by 1.37 per cent. Healthcare tanked 2.44 per cent, telecommunication (2.41 per cent), metal (1.94 per cent), oil & gas (1.91 per cent), teck (1.83 per cent), IT (1.81 per cent), and realty (1.78 per cent). BSE FMCG index emerged as the only gainer. 'Markets began the August series on a negative note, extending the prevailing corrective trend, and ended lower by over half a per cent. Markets continue to grapple with a mixed earnings season, while the recent tariff announcement and persistent foreign fund outflows are further weighing on sentiment,' Ajit Mishra – SVP, Research, Religare Broking Ltd, said. The US president signed an executive order on Thursday that raised tariffs for over five dozen countries, with Washington's negotiations for trade deals going down to the wire ahead of the August 1 deadline. In the Executive Order titled 'Further Modifying The Reciprocal Tariff Rates', Trump announced tariff rates for nearly 70 nations. A 25 per cent 'Reciprocal Tariff, Adjusted' has been imposed on India, according to the list released. The order, however, does not mention the 'penalty' that Trump had said India would have to pay because it purchases Russian military equipment and energy. While August 1 was the tariff deadline, the new levies will come into effect from August 7. Foreign Institutional Investors (FIIs) offloaded equities worth Rs 5,588.91 crore on Thursday, according to exchange data. 'Global equity markets were mostly weak over the past week, as the US tariff saga continued. The Indian equity market continued to underperform global equity markets in the past week and was down 0.8 per cent over this period,' Shrikant Chouhan, Head – Equity Research, said. In Asian markets, South Korea's Kospi, Japan's Nikkei 225 index, Shanghai's SSE Composite index and Hong Kong's Hang Seng settled lower. Equity markets in Europe were trading in the red. The US markets ended in negative territory on Thursday. Global oil benchmark Brent crude declined 0.39 per cent to USD 71.42 a barrel. On Thursday, the Sensex declined 296.28 points or 0.36 per cent to settle at 81,185.58. The Nifty dropped 86.70 points or 0.35 per cent to 24,768.35. PTI SUM SUM BAL BAL This report is auto-generated from PTI news service. ThePrint holds no responsibility for its content.
