Recovery in spending to help boost IT stocks in 2018: Report

Even though IT underperformed the benchmark Sensex in 2017, the possibility of a pick-up in tech-spending during the current year could help improve investor sentiment towards these stocks, says a report.
"IT (large cap stocks) underperformed the Sensex in 2017 as revenue growth was tepid while investment in the business and a strong rupee kept margins in check," global brokerage Morgan Stanley said in a report today.
"We believe a turnaround in IT spending is imminent, which could quickly turn sentiment on these stocks. While structurally the sector faces risks from automation and a slower pace of market share gains from global vendors, we believe a cyclical rally could be in the offing," it added.

But the report flagged the rising rupee, saying it could be a headwind for its optimism.
"The ongoing rupee appreciation is a margin headwind. Any renewed concerns on regulations, especially visas, or new US tax laws could hurt," the report warned.
Accordingly, the American brokerage has upgraded Infosys, TechMahindra and HCL to overweight as valuations are at or below long-term averages.

While the brokerage is silent on Wipro, it says an improvement in BFSI/retail verticals could help the industry leader TCS and hence it has upgraded it to equal weight (EW).
"We upgrade Mphasis to overweight (large exposure to banking and financial sector could surprise positively) but downgrade Hexaware to underweight as it is being plagued by rich valuation and client-specific issues," the report said.

However, the report also noted that "push out" in tech spends could hurt stock performance.