Investors in the Indian IT sector are facing challenging times. Recent insights from Morgan Stanley suggest that now may not be the best moment to invest in this area. The firm warns of a tough macroeconomic landscape and potential delays in key decision-making processes that could hinder revenue growth. As a result, they anticipate that the revenue projections for major IT firms in fiscal year 2026 may fall short of expectations.

Cautious Revenue Growth Forecasts

Morgan Stanley’s analysis, which incorporates insights from Accenture management and findings from their recent CIO survey, points to a conservative start for the year. Most large-cap IT firms are expected to report lackluster performance in the fourth quarter, with quarter-on-quarter growth estimates ranging from -0.9% to +0.4% when adjusted for constant currency.

• February Survey Insights: Respondents anticipated a rebound in IT services growth for 2025, predicting an increase to 3%.
• March Survey Insights: Expectations shifted downward, forecasting a slowdown to 2.2%.

Company-Specific Projections

For Infosys, Morgan Stanley predicts a revenue growth guidance for fiscal year 2026 between 2-5% year-on-year, alongside an EBIT margin forecast of 20-22%. Meanwhile, HCL Technologies is expected to report consolidated revenue growth of 4-6%, factoring in inorganic growth, and an EBIT margin between 18-19%. Wipro is likely to show a more concerning trend, with first-quarter revenue growth anticipated to be flat or decrease by 2%.

Managing Investment Risks

Despite the evident struggles of large-cap IT stocks, Morgan Stanley remains hesitant to recommend adding new positions. They highlight several risks, including:

• A potential prolonged downturn in the macroeconomic cycle.
• Increased downside risks to earnings per share for these companies.
• A suggestion that large-cap stocks may not have hit their lowest points yet.

In terms of preferences, Morgan Stanley favors Tata Consultancy Services (TCS) over Infosys, citing TCS’s solid dividend yield as a buffer against potential downturns. Additionally, they lean towards Tech Mahindra instead of HCL Technologies, and prefer Coforge over Tata Elxsi, due to the latter’s risks to earnings and multiples.

Conclusion

In summary, Morgan Stanley’s outlook on Indian IT services stocks is decidedly cautious. Investors are advised to thoroughly evaluate macroeconomic factors and company-specific challenges before making any decisions in this space. The landscape remains complex, and careful consideration is essential for navigating these turbulent waters.

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