Last week, IT majors TCS and Infosys announced their Q3 earnings which were mostly in line with the Street's estimates. Even though IT underperformed the benchmark Sensex in 2017, the possibility of a pickup in tech spending during the current year could help improve investor sentiment towards these stocks, global brokerage Morgan Stanley said in a report on Tuesday.
"IT (large cap stocks) underperformed the Sensex in 2017 as revenue growth was tepid while investment in the business and a strong rupee kept margins in check," Morgan Stanley said. "We believe a turnaround in IT spending is imminent, which could quickly turn sentiment on these stocks. While structurally the sector faces risks from automation and a slower pace of market share gains from global vendors, we believe a cyclical rally could be in the offing," it added.
But the report flagged the rising rupee, saying it could be a headwind for its optimism.
India's largest IT services firm TCS or Tata Consultancy Services (TCS) has bagged another big outsourcing contract. TCS on Tuesday said it has signed an over GBP 500 million ($690 million) deal with M&G Prudential, the UK and European savings and investments business of Prudential plc. TCS has over the last few weeks announced a slew of large client wins including American insurer Transamerica (over $2 billion), television rating measurement firm Nielsen and British retailer Marks & Spencer. (Read more)
The rupee fell sharply on Tuesday settling beyond the 64 mark against the US dollar.
"The ongoing rupee appreciation is a margin headwind. Any renewed concerns on regulations, especially visas, or new US tax laws could hurt," Morgan Stanley warned in its report.
The brokerage has upgraded Infosys, Tech Mahindra and HCL Tech to overweight as valuations are at or below long-term averages. It said that an improvement in BFSI/retail verticals could help the industry leader TCS and hence it has upgraded it to equal weight (EW).
Research firm Gartner on Tuesday said global IT spending is expected to grow 4.5 per cent to $3.68 trillion this year. "Global IT spending growth began to turn around in 2017, with continued growth expected over the next few years," Gartner Research vice president John-David Lovelock said.
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Projects in digital business, blockchain, Internet of Things (IoT) and progression from big data to algorithms to machine learning to artificial intelligence (AI) will continue to be main drivers of growth, Mr Lovelock added.(With agency inputs)
