IT stocks to stay under pressure in the near term: Morgan Stanley

Mumbai: Morgan Stanley said continued headwinds and earnings downgrade cycle in the information technology sector have rendered the risk-reward unfavourable in the near term.

The brokerage has downgraded Wipro and HCL Technologies while selectively remaining overweight on Tech Mahindra, Infosys and Mphasis.

"Near-term headwinds and lack of catalysts could keep sector performance under pressure," said Morgan Stanley.


The IT index on the BSE ended down 0.2% at 27,122.90 after hitting a 52-week low during the session. These shares have been among the top losers so far in 2022. The IT index is down 30% from the all-time high of 38,713.3 hit on January 17 this year.

Morgan Stanley said IT consensus earnings have declined in the last two quarters but there is room for more downgrades led by both revenue and margin cuts for FY24.

"We expect an FY22-24 earnings per share CAGR (compounded annual growth rate) of high single digits, as FY23 earnings are being impacted by lower margins while FY24 growth will likely be affected by slower growth," said Morgan Stanley. The brokerage added that IT sector stocks are still trading at premiums to historical averages.

Morgan Stanley prefers largecap IT stocks over midcap IT companies.

Within largecaps, Morgan Stanley prefers Tech Mahindra due to good growth visibility and reasonable valuation. The brokerage also prefers Infosys due to market share gains and valuation discount to Tata Consultancy Services. On TCS and L&T Infotech, it has an underweight rating with target prices of ₹2,890 and ₹3,850, respectively.