In the rapidly evolving space of information technology, the shifting macro environment contribute to the flurry. Morgan Stanley sees downside risks coming for both the revenue growth of India IT services and valuation. For some stocks, multiples could become more polarised, according to the brokerage.

With a lower GDP growth in the US, IT sector is in the frontline of impact as the possibly lower flows into the discretionary spend increase risks to revenue growth. Though the currency supports margins and earnings, the valuation multiples have room for downside risks.

Morgan Stanley downgraded Infosys to ‘equal weight’, picking micro stories over macro plays. The brokerage’s top picks are LTIMindtree Ltd. and Coforge Ltd. It prefers Tata Consultancy Services Ltd. over Infosys Ltd.; Tech Mahindra Ltd. over HCLTech and Coforge over Mphasis Ltd.

In the mid cap space, the brokerage picks Coforge over Mphasis and L&T Technology Services Ltd. over Tata Elxsi Ltd. and Cyient.

Growth Slowdown 

Morgan Stanley forecasted a slower pace of recovery with moderate growth due to certain key reasons.

The brokerage’s macroeconomics team recently lowered their projection for US real GDP growth, as they expect firmer inflation and back-end-loaded rate cuts in 2026. This moderation and weak GDP growth will have a domino effect into moderate growth for Indian IT companies as well, according to it.

The commentary coming in from global companies points to signs of a rebound in discretionary spend, but according to analysts, this is likely to be limited to 200-400 bps.

There has also been a change in the tech cycle. This is likely to create a transition phase for tech services companies causing growth to slow in the short term. The brokerage is also lowering its USD revenue growth forecasts by 100-200 bps and expects growth of 4.5% in financial year 2026. Further, it expects 6% growth for India’s large cap IT companies in financial year 2027.

Outlook And Picks

India IT stocks have corrected by 6-18%, against a 6% correction in the Sensex. Despite this drop, relative valuations when compared to the Sensex are still at five-year average, the brokerage said.

Given this, it cited consensus revenue estimates and a potential de-rating risk for multiples back to the long-term average. Morgan Stanley’s target free cash flow multiples are now at a discount to the five-year average for TCS, with most large caps pegged at a discount to the Tata firm.

The brokerage sees growth rates becoming polarised for some players due to company-specific developments. It took note of large deal wins for Coforge and chief executive officer change at LTIMindtree Ltd.

With growth staying weaker for longer, the brokerage sees valuation multiples favouring stocks with topline growth.

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