CLSA, Morgan Stanley urge near-term caution on IT stocks

Global brokerages CLSA and Morgan Stanley have turned cautious on the Indian information technology (IT) sector and warn that the short-term outlook remains uncertain due to ongoing global economic concerns. 

 

A double whammy for the IT sector sentiment on Thursday was US Federal Reserve's (US Fed's) downgrading of 2025 growth estimates for the economy to 1.4 per cent from 1.7 per cent earlier amid higher inflation.

 

As a result, the Nifty IT index slipped 1.54 per cent on Thursday in intra-day deals, with Oracle Financial Services, Coforge and LTIMindtree among the top losers. Tech Mahindra fell as much as 2.9 per cent.  

 

Wipro, however, rallied 1.4 per cent as Morgan Stanley upgraded the stock from underweight to equal-weight and raised the price target to Rs 265 (Rs 216 earlier). 

Thus far in CY25, the Nifty IT index has been an underperformer, slipping nearly 11 per cent as compared to 5 per cent rise in the Nifty 50 index, ACE Equity data shows. Oracle Financial Services, TCS, Wipro and Infosys have been the top laggards, falling up to 25 per cent during this period.

 

Guarded optimism

 

Indian IT firms, CLSA said, are showing "guarded optimism" as discretionary spending remains largely unchanged, while the focus on cost optimisation has intensified. The brokerage, however, expects a V-shaped recovery in the coming quarters even as the near-term outlook remains challenging. 

IT stocks

 

CLSA expects a strong pick-up in order bookings in the first quarter of fiscal 2025-26 (FY26), along with positive commentary on deal pipelines.  Tata Consultancy Services, Infosys, and Wipro have each reported a significant number of large deal wins in recent months, it said. However, broader discretionary demand remains subdued, suggesting a slower conversion from order book to revenue. 

 

“Retail and auto, in particular, have been the most affected by tariff-related uncertainties. Other sectors such as healthcare, manufacturing, hi-tech, and telecom continue to show subdued demand, in line with recent trends,” CLSA said.

 

Sell on rise

 

Analysts led by Gaurav Rateria at Morgan Stanley still stand by their forecast of two years of muted revenue CAGR growth for most players. "In this context, we believe any rally should be used as a good opportunity to trim," they wrote in the recent report.

 

Commentary from global and Indian IT firms suggests no major deterioration in spending, with the June 2025 quarter faring slightly better than expected, Morgan Stanley said. The recent recovery since April lows (in stock prices), the brokerage believes, reflects that the slightly improved outlook is priced in. 

 

"Valuations are below five-year averages but remain unattractive due to muted growth. Relative to the Sensex and Accenture, they appear reasonable, though key triggers for a re-rating are lacking. Stock prices have rallied since April lows, giving opportunity to shuffle portfolios," Morgan Stanley said as they downgraded Tech Mahindra to 'underweight' and upgraded Wipro to 'overweight'.

 

For the long-term

 

Despite the concerns highlighted by CLSA and Morgan Stanley, Gaurang Shah, senior vice-president at Geojit Financial Services, remains bullish on the road ahead for IT stocks from a 12-month perspective. 

 

The IT stocks, he believes, are witnessing a short-term blip after the recent run and amid news flow from the US. In the long run (12 months), Shah expects the Nifty IT index to return 12 - 15 per cent on a conservative basis and outperform the Nifty 50.

 

"The IT stocks will remain volatile in the near-to-medium term, depending on news flow from the US. I don't see drastically disappointing numbers from the IT majors in the quarters ahead," Shah said. "We still have time till July 9 when the tariff deadline expires. Let's wait and see how things unfold." Shah remains bullish on TCS and HCL Tech from the frontline pack, and on Coforge, Cyient, and KPIT Tech in the mid- and small-cap IT segments.