TCS To Wipro: Why Morgan Stanley Raised Target Price For IT Stocks

Morgan Stanley raised the target price for major information technology stocks, citing higher growth visibility and reasonable margin expectations.

The setup for the India IT services sector is good, and it is a must to own selective stocks despite high valuations, the brokerage said in a March 6 note.

The brokerage has revised the target price for large-cap stocks like Tata Consultancy Services Ltd., Infosys Ltd., and HCL Technologies Ltd. while lowering the target prices for LTIMindtree Ltd. and Cyient Ltd.

"The revisions in scenario values and target prices are largely led by longer-term earnings forecasts implying higher multiples," it said.

• Global macro set-up looks good with U.S. GDP seeing upgrades with corporate earnings in the U.S. too holding up well.

• Revenue growth across India and global IT services companies is bottoming out in December 2023 or March 2024 quarters

• Hyperscalers' revenue growth has already bottomed out in the September 2023 quarter with an expected improvement in growth trajectory supported by positive management commentary.

• Investors' positioning is still 'underweight', although that positioning by domestic institutional investors is one of the lowest for the sector.

• Valuations are not cheap. However, during an upcycle stock prices tend to overshoot average multiples.

Our channel checks suggest limited optimism around revenue surprise and margin expansion for the industry as a whole, the brokerage said. "However, we still don’t rule out the possibility of a positive revenue surprise in 2HCY24."

Morgan Stanley said that stock prices have delivered outperformance in the last six months, and valuations are heady. "Until we see signs of an easing spend environment, we stick with TCS and Infosys, where revenue visibility is higher than peers."

The brokerage maintains 'equal-weight' for HCL Tech on account of its valuation. "Our key underweights are Wipro Ltd., Tech Mahindra Ltd. and L&T Technology Services Ltd., and Tata Exlsi Ltd. within the mid caps."