IT Sector Boom: Macquarie Analyst Predicts Strong Growth for Large and Mid-Cap Stocks

Macquarie's Ravi Menon, a leading analyst in Indian IT services and technology, believes the sector is poised for significant growth, potentially mirroring the tech boom of the early 2000s. He forecasts robust long-term prospects, with a particular focus on large and mid-cap stocks.

Menon's bullish outlook is based on several factors. He believes that the shift in consumer behaviour during the pandemic, which saw a surge in digital engagement, has created a lasting need for digital transformation. This, in turn, is driving demand for IT services, particularly outsourcing.

"We think that the sector has a really strong run ahead," Menon asserts. "This is the largest tech move we have seen in enterprise technology since the 2000s, and we are still in the early stages."

While Menon anticipates growth across the sector, he is particularly optimistic about certain segments. The financial services (BFSI) sector is expected to lead the charge, with accelerated spending on digital initiatives. Telecom, on the other hand, faces headwinds due to sluggish 5G rollouts and the lack of corresponding revenue growth, leading to a negative outlook on Tech Mahindra.

In the automotive sector, Menon sees potential for a delayed recovery as companies adjust their spending on research and development (ER&D) due to factors such as EV inventory build-up.

AI's role in the IT sector is another key factor. Menon sees it as a catalyst for legacy modernisation, not a threat to traditional IT services. He highlights that Fortune 500 companies are unlikely to adopt AI-generated solutions without rigorous scrutiny due to concerns about intellectual property and security.

Furthermore, coding and testing represent only 40% of the software development process, leaving ample space for human expertise and strategic decision-making. Menon argues that AI can enhance productivity, but the impact is likely to be modest, with gains in the range of 10-20%.

While large-cap companies like TCS and HCL Technologies offer stability and a strong track record, Menon sees faster growth potential in the mid-cap segment. He identifies Persistent Systems as a key standout, expecting over 20% growth in the coming year. However, he cautions investors about the premium associated with mid-cap investments, which could be subject to sector-wide derating.

Menon's mid-cap picks include an outperform rating for Persistent Systems and a neutral rating for Coforge, with some caution due to its recent acquisition of Cigniti. Other mid-cap companies are rated underperform, including Mphasis and LTTS, due to slower growth projections for engineering services and concerns about their valuations.

In the small-cap space, Menon favours Birlasoft over Mastek, citing a stronger portfolio and the recent appointment of a permanent CEO.

Looking ahead, Menon expects double-digit growth for the IT sector in fiscal year 2026. He attributes this forecast to anticipated Fed rate cuts rather than the US election, although the two events coincide. The rate cuts are expected to bolster confidence in the US economy and encourage businesses to invest in IT.

Despite potential pricing pressures, Menon remains optimistic about margins. He points to upward movement in pricing according to ISG, a deal advisory firm. This, coupled with the anticipated strong growth, suggests that margins will likely hold steady, and even potentially expand, in the coming year.

Macquarie's positive outlook on the IT sector, particularly for large and mid-cap stocks, is based on the enduring demand for digital transformation, the growth of AI, and a potential easing of economic headwinds. Investors seeking exposure to this sector should carefully consider Menon's insights and assess the risks and opportunities within different sub-segments.