Small but Mighty: How Mid-Cap IT Stocks Are Outgrowing Industry Leaders

Synopsis: Mid-cap IT stocks are outgrowing and outperforming industry giants due to their specialised focus, agility, and dominance in high-growth digital niches. While large-cap IT firms struggle with legacy businesses and slower discretionary spending, midcaps continue to deliver strong growth and superior returns. However, easing global conditions and AI-led deal ramp-ups could help narrow this gap over the next few years.

In the last 3 years, mid-cap IT companies have significantly outperformed their large-cap peers in both sales growth and stock market returns. While large-cap IT firms (like TCS, Infosys, and Wipro) have struggled with single-digit revenue growth due to global headwinds, mid-cap IT firms (like Persistent Systems, KPIT Technologies, and Coforge) have consistently delivered double-digit growth. This divergence is primarily driven by the “specialization vs. generalization” model, where midcaps dominate high-growth niches.

IT Industry Overview

The Indian IT industry has quietly become one of the strongest engines of the global economy. Worldwide, technology spending already stands at over US$ 10.52 trillion in 2023 and is expected to nearly triple to US$ 26.92 trillion by 2032, at an 11% CAGR, driven by cloud computing, artificial intelligence, data analytics, cybersecurity, and automation. Over the last decade, the country’s IT industry has grown from US$ 118 billion in FY15 to an estimated US$ 283 billion in FY25, with exports contributing a massive US$ 224 billion. More than half of this export revenue comes from the US.

The industry now contributes close to 10% of India’s GDP, directly employs over 5.4 million people, and supports nearly 15 million indirect jobs. Growth is being powered by next-generation themes: India’s public cloud market is set to expand from US$ 3.8 billion in H1 FY23 to US$ 17.8 billion by 2027, while India’s artificial intelligence market is set to triple to US$ 17 billion by  2027. Emerging as one of the fastest-growing AI economies globally, artificial intelligence alone could add nearly US$ 957 billion to India’s Gross Domestic Product (GDP) by 2035. 

Why Midcap IT Outperforms

Deep Domain Expertise and Client Stickiness

Companies like KPIT Technologies focus exclusively on automotive mobility/EVs. Persistent Systems focuses heavily on healthcare and software product engineering. In these niches, midcaps are often strategic partners rather than just vendors. Their work is critical to the client’s core product, making it harder for clients to cut spending even during a downturn.

Smaller Base Effect

It is mathematically easier to grow a $1 billion revenue base by 20% than it is to grow a $25 billion revenue base (like TCS) by the same rate. Large caps need massive “mega-deals” (worth $1B+) to move the needle, which are scarce in a slow economy. Midcaps can achieve their targets with smaller, more frequent deal wins ($50M–$100M), which are still abundant. Along with that, the large caps are heavily exposed to discretionary spending (large transformation projects). When the US/Europe economy slows, these massive projects are the first to be paused. On the other hand, Midcaps are seen as more agile in adopting new technologies (like generative AI pilots) and have smaller decision-making loops, allowing them to close deals faster than their larger bureaucratic peers.

Why are the giants struggling while the mid-sized players thrive?

A significant portion of Largecap revenue comes from “Legacy Maintenance” (keeping old systems running). This is a low-growth, low-margin business that drags down their overall growth rate. Large caps are proxies for the global economy. Large caps are also vulnerable to US Fed rate decisions, as large caps suffer direct hits; the BFSI segment often accounts for 30-40% of their revenue. Large caps maintain massive “benches” (unbilled employees). When demand drops, this becomes a huge fixed cost, hurting margins. Midcaps typically run leaner operations. Several large IT majors have faced CEO changes and restructuring in 2024-2025, leading to internal instability that can distract from aggressive sales growth.

Performance Comparison: Sales & Returns & Valuations

(Sales reflects the 3-year CAGR, & returns represent 3-year performance.)

The table highlights how individual mid-cap and large-cap IT stocks compare in terms of sales growth, returns, and valuations. MidCap IT stocks show robust sales growth, averaging around 20%, with standout performers like Persistent Systems Ltd. at 28% and KPIT Technologies Ltd. at 34%. Returns are exceptionally strong, led by Persistent Systems at 219% and Oracle Financial Services Software Ltd. at 156%, though PE ratios are elevated (average 41), signalling high growth expectations. Companies like Coforge Ltd (23% sales growth, 140% returns, PE 54) and L&T Technology Services Ltd (18% growth, 15% returns, PE 37) exemplify this segment’s momentum in specialized IT services.

In contrast, LargeCap IT stocks exhibit more modest sales growth (average 8%), with TCS and Infosys both at 10%, reflecting mature operations amid softer demand. Returns vary widely, from HCL Technologies Ltd.’s 61% gain to TCS’s -1% dip, while PE ratios remain attractive (average 29), appealing to value investors. Leaders like LTIMindtree Ltd (13% growth, 42% returns, PE 38) and Wipro Ltd (4% growth, 32% returns, PE 21) underscore stability in core IT consulting.

Overall, MidCaps outperform on growth and returns but trade at premium valuations, suiting aggressive investors, whereas LargeCaps offer lower risk with reasonable multiples. Metrics suggest MidCaps drive the sector upside via niche expertise in software and tech services. Investors should weigh macroeconomic factors like the US spending cycles impacting both groups.

Looking Ahead:

India’s IT and digital services sector is entering a decisive AI-led transformation phase, moving rapidly from experimentation to scale, as highlighted in The AIdea of India: Outlook 2026. According to the survey of 200+ Indian enterprises, 76% of business leaders expect GenAI to have a significant business impact, 47% already have multiple AI use cases live, and 10% are scaling AI across the enterprise, signaling a clear shift from pilots to production. While over 95% of firms still allocate less than 20% of IT budgets to AI, urgency is high, with 91% citing speed of deployment as the key buying criterion, driving strong demand for cloud, platforms, and IT services integration.

Looking ahead, the IT sector stands to benefit from rising enterprise spending on GenAI, agentic AI, cloud modernization, cybersecurity, and data platforms, alongside India’s Rs 10,000+ crore IndiaAI Mission, 40,000-GPU capacity buildout, and sovereign AI push, which together could help position India as a global AI services and solutions hub. Over the next few years, IT growth will increasingly be driven not just by headcount expansion but by nonlinear productivity, AI-led deal wins, and platform-led revenue models, as enterprises prioritize measurable ROI through automation, faster time-to-market, and AI-native transformation rather than traditional cost arbitrage.

Overall, midcap IT companies have outperformed because they offer growth scarcity in a slow market. By dominating specific niches (auto, healthcare, ER&D), they insulated themselves from the broader spending cuts that hurt the generalist large caps. However, looking at late 2025, the gap may narrow. As global interest rates ease and large-scale AI deployment begins, large-cap IT companies are poised for a recovery, potentially offering a safer entry point for investors today compared to the highly valued midcaps.

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