IT Q2 Preview: Stability Or Surprise? Morgan Stanley's Analysis Of Growth Divergences — Check Top Stock Picks

Morgan Stanley expects the second quarter of fiscal year 2026 earnings to confirm business stability for the Indian IT services sector, but warns that a lack of clarity on growth acceleration for fiscal year 2027 will persist, keeping a lid on investor sentiment. The analyst highlights that concerns over muted FY27 growth and the continued de-rating of global tech services are the main factors currently affecting the sector’s valuation, making it tricky to identify new investment opportunities.

Morgan Stanley expects near-term growth trends to be stable, marked by a continued lack of acceleration in discretionary spending across most segments. While a strong pipeline of large deals exists, these are primarily focused on consolidation and efficiency-led projects rather than new transformation initiatives. The brokerage expects growth divergences to remain significant in Q2FY26. Large-cap companies are forecast to see sequential growth ranging between a 0.2% slip and 2.2% uptick in constant currency terms. The mid-cap firms are showing a wider range of 0.7% to 5.6% quarter-over-quarter CC, according to the brokerage. Among the large-caps, Infosys and LTIM are expected to lead, while TCS and Wipro may lag, according to Morgan Stanley. While in the mid-cap space, Coforge is expected to lead, with Tata Elxsi lagging.

For the second half of the year, Morgan Stanley expects several large companies to tighten their revenue guidance bands. Infosys is projected to narrow its full-year FY26 revenue guidance to 2.5%-3% year-over-year CC. HCLTech is expected to narrow its guidance to 3.5%-4.5% year-on-year CC, maintaining its midpoint. For Wipro, the brokerage forecasts a Q3FY26 revenue growth guidance of 0-2% quarter on quarter CC.

On the margins front, currency movements are expected to provide a tailwind in Q2. The rupee's recent depreciation against major currencies such as the US Dollar and the British Pound is likely to help margins, with most large caps showing an improvement in Ebit margins. However, despite these favorable currency trends, the brokerage does not anticipate any changes to the full-year FY26 margin outlooks for key players.

Morgan Stanley notes that the sector's high relative price-to-earnings multiple compared to global peers like Accenture is limiting upside potential. Beyond the upcoming quarterly results, investors are likely to gravitate toward long ideas in stocks that offer clearer second-half visibility and have recently underperformed, such as Coforge and Mphasis.