Indian IT services stocks set for turnaround in 2018: Morgan Stanley

Indian IT services stocks are set for a turnaround in 2018 as recovery in spending is "imminent", says a Morgan Stanley report.

The IT sector underperformed the Sensex in 2017 as revenue growth was tepid, while investment in the business and a strong rupee kept margins in check.

According to the global financial services major, a turnaround in IT spending could quickly turn sentiment on these stocks.

Though the sector faces risks from automation and a slower pace of market share gains from global vendors, a cyclical rally could be in the offing, it added.

As per Morgan Stanley's January-2018 proprietary global CIO survey, an acceleration in IT services growth relative to 2017 is likely.

Moreover, recent deal announcements by companies (such as the USD 2.25 billion deal win by TCS last month) indicate potential conversion of deal pipelines.

"Valuations are at or below long-term averages and an improving global macro could spur tech spending, which could re-rate stocks," Morgan Stanley report said, adding that the industry looks "attractive".

The report further noted that push out in tech spends could hurt stock performance. Further, rupee appreciation is a margin headwind and any renewed concerns on regulations, especially visas, or new US tax laws could hurt sentiments.