Morgan Stanley Warns Against Buying Dips In Indian IT Services
Most large-cap IT companies are likely to show weak fourth-quarter trends, with quarter-on-quarter growth ranging from -0.9% to +0.4% in constant currency terms.
Morgan Stanley has advised investors to avoid buying dips in Indian IT services stocks, citing a challenging macroeconomic environment and potential delays in decision-making that could impact revenue growth. The firm expects the fiscal year 2026 revenue outlook for major IT companies to be in-line to disappointing.
According to Morgan Stanley, data points such as commentary from Accenture management and their own CIO survey results indicate a conservative start to the year. Most large-cap IT companies are likely to show weak fourth-quarter trends, with quarter-on-quarter growth ranging from -0.9% to +0.4% in constant currency terms. The survey revealed a shift in client behavior, with respondents in February expecting 2025 IT services growth to accelerate to 3%, while those polled in March anticipated a deceleration to 2.2%.
For Infosys, Morgan Stanley expects fiscal year 2026 revenue growth guidance of 2-5% year-on-year and an Ebit margin outlook of 20-22%. HCL Technologies is projected to have consolidated revenue growth guidance of 4-6% year-on-year, including inorganic growth, with an Ebit margin of 18-19%. Wipro's first-quarter revenue growth guidance is expected to be between -2% and flat quarter-on-quarter, indicating a slowdown in momentum.
Despite the recent underperformance of large-cap IT stocks, Morgan Stanley remains cautious about adding positions. The firm highlights the potential for a prolonged and worsening macroeconomic cycle, further downside risks to earnings per share, and the possibility that large-cap stocks may not have reached their troughs.
Morgan Stanley prefers Tata Consultancy Services (TCS) over Infosys due to TCS's downside support from its dividend yield. The firm also favors Tech Mahindra over HCL Technologies and Coforge over Tata Elxsi, citing risks to earnings and multiples for the latter companies.
Overall, Morgan Stanley's outlook suggests a cautious approach to Indian IT services stocks, emphasising the need for careful consideration of macroeconomic factors and company-specific risks.
