Nifty IT at 9-month low; brokerages flag weak earnings outlook for sector

Among individual IT stocks, Infosys slipped over 5 per cent in intraday deals on Wednesday, after Morgan Stanley downgraded the stock to 'equal weight', and preferred TCS.

Information technology (IT) stocks ended at their lowest in nearly nine months after a fresh bout of selling, triggered by concerns over a recession in the US, the key market for domestic software exporters. A report by Morgan Stanley citing risks to growth also weighed on sentiment.

 

The Nifty IT, a gauge for the performance of technology stocks, fell ne­arly 3 per cent to 36,311, its lowest close since June 28. Over the past month, the Nifty IT has dropped nearly 15 per cent amid an uncertain outlook for the US economy. By comparison, the Nifty 50 is down 2.5 per cent during this period.

 

The recent developments have led brokerages to sound an alarm on the earnings outlook for the Indian IT sector, expecting companies to post lower revenue growth in the future.

 

According to a Morgan Stanley note, macro and other lead indicators point to a slower recovery in revenue growth in 2025-26 (FY26) compared to earlier expectations. Further, with the new technology cycle ongoing, they now see a likelihood of a “transition phase” as spending is re-prioritised and growth rates moderate for a prolonged period.

 

“In this context, we lower our 2026-27 (FY27) revenue growth forecasts for the sector as a whole. Our earnings per share (EPS) estimates don’t change much as we factor in rupee depreciation versus the US dollar. However, we lower our target multiples for stocks as we see a risk of stocks reverting closer to their long-term average multiples in the absence of any material positive catalyst,” wrote analysts Gaurav Rateria, Sulabh Govila, and Sakshi Rana of Morgan Stanley in the note.

 

Among stocks, Morgan Stanley has downgraded Infosys to ‘equalweight’ and prefers Tech Mahindra over HCLTech. It has also cut target prices for most front-line IT stocks across the board.

 

“Risks to growth have increased, and we lower our growth forecasts across the board by 100-200 basis points (bps) for FY26-27. Our bear case now expects growth rates to be in line with or lower than 2023-24/2024-25 (FY25) trends, assuming macro volatility leads to a freeze in discretionary spending and cost take-out projects face heightened competitive intensity,” the Morgan Stanley note said. 

 

IT stocks hit hard

 

Meanwhile, at the bourses, the Nifty IT was the worst hit in trade on Wednesday, with all its constituents ending sharply lower. L&T Technology Services (LTTS) was the top loser, slipping nearly 5.5 per cent to ₹4,391. Bes­ides Morgan Stanley, analysts at Motilal Oswal Financial Services (MOFSL) have also turned cautious on the sector. They have downgraded Infosys and LTTS to ‘neutral’ and Wipro to ‘sell’ but upgraded Tech Mahindra to ‘buy’.

 

The evolving backdrop, MOFSL said, has made forecasting discretionary spending in FY26 uncertain, and a meaningful improvement over FY25 is no longer a given.

 

Six months on, MOFSL noted, the chances of a rate cut in the US have dipped, while geopolitical and tariff risks are weighing on stability.

 

Sentiment, they said, has turned cautious, with enterprises taking a “wait-and-watch” stance. While generative artificial intelligence adoption is progressing, it is not yet enhancing IT services revenue. Clients are still prioritising capital expenditure over services spending, making FY26 discretionary spending uncertain, MOFSL said.

 

On the valuation front, Nifty IT’s price-to-earnings (P/E) ratio, MOFSL said, remains at an elevated premium to the Nifty P/E despite the recent corrections; its current premium of 37 per cent is still higher than the last five-year average, which includes pandemic-era highs.