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2018 Will Be A Turnaround Year For Indian IT, Morgan Stanley Says 

Cyclical rally in Indian IT sector could be in the offing: Morgan Stanley

Surface Laptop computers are displayed at the hardware lab of the Microsoft Corp. main campus in Redmond, Washington. (Photographer: Mike Kane/Bloomberg)
Surface Laptop computers are displayed at the hardware lab of the Microsoft Corp. main campus in Redmond, Washington. (Photographer: Mike Kane/Bloomberg)

After a subdued performance in 2017, stocks from the Indian information technology sector are set for a turnaround this year.

That’s the outlook coming from global brokerage firm Morgan Stanley, which says it expects the sector, which underperformed the benchmark Sensex last year, to see a cyclical rally.

There was an acceleration in IT services growth relative to 2017 for the second consecutive quarter in October-December period, according to its January 2018 global chief information officer survey.

Indian IT companies have started reporting significant deal signings with business from Europe looking at an uptick. North America is expected to see a pick up from banking clients mid-2018.

Digital deals, too, have started seeing an increase in sizes, and adoption of digital services is on a steady rise indicated by the increase of their contribution to revenues for IT companies. This is likely to improve revenue growth and visibility.

 2018 Will Be A Turnaround Year For Indian IT, Morgan Stanley Says 

Catalysts

  • Large deal wins in traditional outsourcing, infrastructure management and business process outsourcing segments can lend visibility on revenue growth.
  • Recovery of spending in banking, financial services and insurance and retail verticals.
  • Large scale up in digital deals and increasing deal win rates for Indian vendors.
  • Neutral tax impact from new U.S tax law on Indian companies.
  • Rupee depreciation against the U.S. dollar to aid margin.

Top Picks

Morgan Stanley is bullish on large cap IT companies. Large cap stocks have underperformed the Sensex for the last three years. Valuations are at or below long-term averages, and an improving global macro could spur tech spending,which could re-rate stocks, it said.

It upgraded Infosys Ltd., Tech Mahindra Ltd., HCL Technologies Ltd. and Mphasis to ‘Overweight’; Tata Consultancy Services Ltd. to ‘Equal Weight’; and the industry as a whole to ‘Attractive’.