Synopsis:
Morgan Stanley’s latest report suggests that the Indian IT services sector will continue to see near-term stability, but FY27 growth acceleration remains uncertain.
The Indian IT services sector is expected to maintain stable performance in the near term, but uncertainty around growth acceleration in fiscal year 2027 is keeping investors cautious. According to Morgan Stanley, while Q2FY26 earnings are likely to confirm business stability, the lack of clarity on FY27 growth prospects is creating valuation pressures and limiting fresh investment opportunities. Sector players are experiencing a mixed environment: large deal pipelines exist, but most are focused on consolidation and efficiency rather than transformative initiatives.
Near-Term Stability but FY27 Growth Concerns Loom
Morgan Stanley’s analysis highlights that muted growth expectations for FY27, combined with the ongoing de-rating of global technology services, are key factors affecting the sector’s valuations.
Investors are finding it challenging to identify new high-conviction opportunities as discretionary IT spending remains subdued across most segments. While large deals are still being closed, they are largely efficiency-led rather than driving new transformation programs.
Quarterly Growth Divergence Among Large and Mid-Cap Players
The brokerage forecasts significant divergence in Q2FY26 performance across large- and mid-cap IT companies. For large-cap firms, sequential growth is expected to range from a 0.2 percent decline to a 2.2 percent uptick in constant currency terms, with Infosys and LTIM projected to lead while TCS and Wipro may lag. In the mid-cap segment, Coforge is likely to be the frontrunner, whereas Tata Elxsi could underperform.
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Guidance Narrowing in H2FY26
Looking at the second half of FY26, Morgan Stanley anticipates several large companies will tighten revenue guidance bands. Infosys is expected to narrow its full-year revenue guidance to a 2.5-3 percent year-on-year in constant currency terms, while HCLTech may be expected to narrow its guidance to a 3.5-4.5 percent YoY CC, maintaining its midpoint. For Wipro, sequential revenue growth guidance for Q3FY26 is projected to be between 0 and 2 percent.
Margin Outlook Supported by Currency Movements
Currency fluctuations are expected to provide a positive impact on margins in Q2FY26. The recent depreciation of the Indian rupee against major currencies such as the US Dollar and the British Pound is likely to improve EBIT margins for most large-cap IT firms. Despite this favorable tailwind, Morgan Stanley does not foresee any changes to the full-year FY26 margin outlook.
Valuation Challenges and Investment Implications
Morgan Stanley cautions that high relative price-to-earnings multiples compared to global peers like Accenture are limiting the upside potential for Indian IT stocks. In the current environment, investors are expected to focus on companies with clearer second-half visibility or those that have underperformed recently. Mid-cap names such as Coforge and Mphasis are highlighted as potential candidates for long ideas.
Written By Manan Gangwar
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