Morgan Stanley in its latest note on information technology sector said it sees downside risks emerging for both the revenue growth of India IT services and valuation multiples. For select stocks, multiples could become more polarised, the foreign brokerage warned as it showed preference for Tata Consultancy Services Ltd (TCS) over Infosys Ltd and Tech Mahindra Ltd over HCL Technologies Ltd in the largecap space. The foreign brokerage maintained its 'underweight' on Wipro Ltd.
Domestic IT stocks have corrected 6-18 per cent against a 6 per cent slide for Sensex in 2025 so far. Despite the drop, their relative valuations against Sensex are still at 5-year average. The IT index traded at 14.5 per cent premium against the 5-year average of 14.4 per cent.
Morgan Stanley sees risks to consensus revenue estimates and a potential de-rating risk for multiples back to the long-term average. It said the target free cash flow (FCF) multiples are now at a discount to the 5-year average for TCS, with most other large caps pegged at a discount to TCS.
"We see growth rates becoming polarised for some players due to company-specific developments (large deal wins for Coforge, CEO change at LTIMindtree). With growth staying weaker for longer, we see valuation multiples favoring stocks seeing topline growth," it said.
The brokerage prefers LTIM and Coforge mostly. In the largecap space, it prefers TCS to Infosys and TechM to HCL Tech. In the midcap space, it like Coforge over Mphasis; and LTTS over Tata Elxsi and Cyient.
On Coforge, the brokerage cut its target price to Rs 9,400 from Rs 11,500. It reduced its target on TCS to Rs 3,950 from Rs 4,660; and for Infosys to Rs 1,740 from Rs 2,150. HCL Tech's target has been slashed to Rs 1,600 from Rs 1,970 and TechM to Rs 1,550 from Rs 1,750.
Tata Elxsi (Rs 5,400 from Rs 6,000), Cyient (Rs 1,210 from Rs 1,500), Mphasis (Rs 2,570 from Rs 3,300) and LTIMindtree (Rs 5,800 from Rs 6,800) are a few other stocks where the brokerage cut its target prices on. For Wipro, its target price stood at Rs 265.
Morgan Stanley forecast a slower pace of recovery with moderate growth for a prolonged period, as its macro economics team recently lowered forecast for US real GDP growth. It sees firmer inflation and back-end loaded rate cuts in 2026. This would mean a moderation in nominal GDP growth and a weak multiplier effect translating into moderate growth for India IT companies.
The brokerge said the commentary from global companies points to signs of a rebound in discretionary spend – acceleration in 2025 against 2024 is likely to be limited to 200-400 basis points. Also, it feels that the change in the tech cycle is likely to create a transition phase for tech services companies, akin to 2016/17, causing growth to moderate in the short term.
"We are lowering our dollar revenue growth forecasts by 100-200bps and expect growth of 4.5 per cent in F26 and 6 per cent in F27 for India's large cap IT companies," Morgan Stanley said.