Morgan Stanley Advises Caution on IT Stocks Amid Market Rally

In a recent analysis, Morgan Stanley has expressed caution regarding the prospects of Indian Information Technology (IT) stocks, despite a rally in their prices since April 2025. The global brokerage firm highlighted that while this upward movement offers an opportunity for investors to rebalance their portfolios, there are significant challenges ahead that could hinder further growth in the sector.

The Nifty IT index has experienced a decline of nearly 10% in 2025, raising concerns among stakeholders. On June 19, 2025, Morgan Stanley downgraded Tech Mahindra from 'Equal-weight' to 'Underweight,' although it slightly raised its target price from ₹1,550 to ₹1,575 per share. Conversely, Wipro saw an upgrade from 'Underweight' to 'Equal-weight,' with an increased target price of ₹265, up from ₹216.

Among the large-cap IT firms, Morgan Stanley favors Tata Consultancy Services (TCS) with an 'Overweight' rating, while Infosys and Wipro received 'Equal-weight' ratings. In the mid-cap category, Coforge is rated 'Overweight,' and Mphasis is also rated 'Equal-weight.' The report advised caution regarding engineering and R&D firms, maintaining an 'Equal-weight' rating on LTTS but downgrading Cyient and Tata Elxsi to 'Underweight.'

According to Morgan Stanley's report titled "India Technology: IT Services," the recent rally in stock prices is perceived as a solid opportunity for investors to trim their positions. Despite a slight improvement in revenue growth forecasts, the firm reiterated that the sector is poised for two years of subdued revenue compound annual growth rate (CAGR).

Key insights from Morgan Stanley’s note indicated a slightly better growth outlook than previously anticipated, with tighter guidance expected. However, the report also pointed to weak discretionary spending and vendor consolidation opportunities as factors affecting future growth. Despite minor improvements, the brokerage remains cautious, citing that the sector's outlook is still below initial expectations for fiscal year 2025.

Valuation multiples currently sit below five-year averages, but Morgan Stanley argues that they are not compelling given the muted revenue and earnings growth. While valuations compared to the Sensex and Accenture do not seem expensive, the absence of significant re-rating triggers raises concerns.

This cautious stance from Morgan Stanley reflects a broader sentiment in the market regarding the Indian IT sector's future. As companies navigate a challenging economic landscape, stakeholders are advised to proceed with caution and consider rebalancing their investments accordingly. Market analysts will continue to monitor developments in the IT sector closely, particularly as firms respond to evolving market conditions and trends.

In conclusion, investors are urged to exercise prudence in their trading strategies, particularly in light of the current market dynamics and the insights provided by Morgan Stanley. With the potential for ongoing volatility, strategic adjustments may be essential to mitigate risks in IT stock investments.