- India's next tech spending may favor mid-tier IT challengers over Tier-1 vendors
- Morgan Stanley rates Persistent Systems and Hexaware Technologies as Overweight
- Persistent seen as a structural growth play with 17-18% revenue CAGR by 2026-28
India's next technology spending cycle could favour IT challengers over the country's traditional Tier-1 vendors, according to Morgan Stanley. The brokerage has initiated coverage on Persistent Systems and Hexaware Technologies with an Overweight rating, arguing that smaller IT services firms could have greater growth visibility as the technology cycle shifts towards AI-led spending. Morgan Stanley has set a price target of Rs 6,150 for Persistent Systems and Rs 600 for Hexaware Technologies. The brokerage describes Persistent as a structural beneficiary of the new technology cycle, while positioning Hexaware as a recovery play.
The thesis rests on how India's mid-tier IT companies have evolved since the previous digital cycle. Morgan Stanley said "challengers" now have more diversified service offerings, are expanding into new geographies and capabilities, and are increasingly competing for large deals. They also offer clients greater access to senior executives, which the brokerage believes can support faster decision-making and execution.
The brokerage expects this advantage to matter as enterprises experiment with AI. Unlike some traditional technology spending, the new pool of AI-related work can involve shorter, project-based engagements.
Morgan Stanley believes this could create opportunities for challengers to enter accounts through smaller projects and subsequently expand their share of client spending.
Why Persistent And Hexaware?
Persistent Systems is Morgan Stanley's structural growth story. It expects Persistent's US-dollar revenue and earnings per share to compound at roughly 17-18% annually between CY26 and CY28. The brokerage points to the company's track record of moving into higher-growth areas, its expanding capabilities from product engineering to enterprise IT and AI-led revenue pools, and its ability to win large deals.
Hexaware, meanwhile, is being viewed through a recovery lens. Morgan Stanley expects roughly 9.5% revenue CAGR and 17% EPS CAGR over CY26-28, with the potential recovery tied to client-specific issues reversing. The brokerage also highlights Hexaware's cash-flow profile and success in vendor-consolidation exercises across its largest accounts.
Morgan Stanley's broader challenger basket includes Coforge, Mphasis, Hexaware, Persistent and LTM. While it assigns Overweight ratings to the first four, its stated order of preference based on growth visibility and valuation relative to revenue growth is Coforge, Mphasis, Hexaware, Persistent and LTM.
The key risk remains the impact of AI-led productivity gains on traditional IT services. Morgan Stanley expects generative AI to create new revenue pools, but also warns of potential deflation, revenue cannibalisation and the need for continued investment in skills and technology.
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