CLSA and Morgan Stanley advise caution on Indian IT stocks; prefer Infosys, TCS, Wipro, Persistent, Coforge

As investor interest in technology stocks resurges, the Indian IT sector has staged a modest recovery in recent weeks. The Nifty IT index has risen nearly 4 percent over the past month, reflecting improving sentiment. However, global brokerage firms CLSA and Morgan Stanley remain cautious in their outlook, warning that weak discretionary spending and persistent global macroeconomic uncertainties could limit further gains.

Despite the recent uptick, the Nifty IT index has lagged behind the broader markets in 2025, declining nearly 11 percent year-to-date, compared to a 5 percent gain in the Nifty 50. 

Demand Concerns Cloud the Outlook

Both CLSA and Morgan Stanley believe the current environment is still challenging for the Indian IT sector. While the recent rebound in Nifty IT reflects investor interest, the ground reality across core verticals remains tepid. CLSA noted that discretionary IT spending remains soft, especially in segments like retail and automotive, although it also suggested that a broad-based economic slowdown could later prompt companies to ramp up their IT investments as a cost-optimization strategy.

Morgan Stanley, echoing similar concerns, reported that interactions with IT companies revealed weak deal pipelines and limited demand recovery. The firm emphasized that any turnaround in the sector is likely to be gradual, uneven, and selective, depending heavily on geography, industry, and client budgets.

Contrasting Yet Cautious Strategies

Despite their shared caution, the two brokerages diverge in their near-term positioning strategies.

CLSA remains relatively optimistic, highlighting potential in the banks, financial services, and insurance (BFSI) verticals, which it believes could see a V-shaped recovery. The firm also considers current valuations to be compelling, backing stocks like Infosys, Tech Mahindra, and Persistent Systems. However, it advised holding LTIMindtree, pending clearer earnings visibility.

On the other hand, Morgan Stanley has taken a more defensive tone. While it acknowledged a slight improvement in revenue forecasts, it continues to foresee a prolonged slowdown in the sector for the next two years. Morgan Stanley advised investors to use any rally as an opportunity to book profits, citing stretched valuations relative to fundamental performance. The brokerage prefers TCS, Infosys, and Wipro among large-cap names and backs Coforge and Mphasis in the mid-cap space. Conversely, it recommends avoiding HCLTech, LTIMindtree, and Tech Mahindra. Notably, Tech Mahindra was downgraded to 'Underweight' with a target price of ₹1,575, while Wipro was upgraded to 'Equal-Weight' with a target of ₹265.

Strategic Guidance and Valuations

In terms of strategy, CLSA suggests staying invested, particularly in companies with strong order books and sectoral tailwinds, such as BFSI. In contrast, Morgan Stanley urges caution, advocating a rotational approach where investors trim exposure during rallies and focus on undervalued, defensive large-cap stocks.

Valuation-wise, CLSA believes Indian IT stocks are attractive when compared to their long-term averages, making selective opportunities worth exploring. Morgan Stanley, however, pointed out that while valuations have come off their peaks, they are not cheap, especially in the context of muted growth expectations. It added that further correction is possible if earnings growth fails to meet estimates in the upcoming quarters.

In summary, global brokerages CLSA and Morgan Stanley advise a measured and selective approach to Indian IT stocks. While recent gains may reflect early signs of recovery, macroeconomic fragility, inflationary pressures, and weak discretionary IT spending continue to pose challenges. CLSA sees opportunity in BFSI-focused IT names at current valuations, while Morgan Stanley urges caution, advising investors to lock in profits during rallies and adopt a defensive allocation strategy until stronger signs of recovery emerge. For investors, the key will be to differentiate between short-term optimism and long-term resilience within the IT space.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.