IT stocks outperform NIFTY50 in June amid valuation comfort; Morgan Stanley, CLSA diverge on outlook

IT stocks have rallied sharply in June, outperforming the benchmark NIFTY50 index by a wide margin. The NIFTY IT index, which tracks the shares of the top IT companies on the National Stock Exchange, has gained over 4.58% so far this month, compared to a 0.25% uptick in the NIFTY50 index.

The rebound in IT shares came after a period of consolidation driven by subdued March-quarter results and conservative revenue guidance issued by major IT players, analysts said.

The rebound is largely being attributed to attractive valuations after several IT stocks corrected sharply in recent months. However, while the price action signals investor optimism, global brokerages Morgan Stanley and CLSA remain cautious and have issued contrasting views on the sector's medium-term trajectory.

Morgan Stanley remains cautiously optimistic

Morgan Stanley has maintained a guarded stance, noting a "slight improvement" in revenue growth expectations. However, the brokerage reiterated its broader thesis of a prolonged slowdown, predicting two years of muted compound annual revenue growth (CAGR) for the sector.

While deal pipelines and management commentary suggest some improvement, the discretionary spending environment remains weak, and vendor consolidation is more selective than expected, Morgan Stanley said.

Morgan Stanley added that any rally in IT shares could be seen as a profit-booking opportunity rather than chasing the upside. The firm believes valuations have run ahead of fundamentals in some cases, especially given the persistent macro-level uncertainty.

CLSA expects V-shaped recovery

CLSA has taken a more constructive view, anticipating a V-shaped recovery in IT spending over the next few quarters. While acknowledging that discretionary spending remains muted and macro headwinds persist, the brokerage sees green shoots emerging.

CLSA highlighted that while BFSI (banking, financial services, and insurance) continues to show robust demand, other verticals remain weak. However, cost optimisation and vendor consolidation are expected to drive medium-term momentum.

Subdued management commentary

The optimism seen in stock prices is at odds with the muted guidance from IT companies. For instance, Wipro has forecast a 3.5% to 1.5% decline in revenue for the April–June quarter (Q1FY26), while Infosys expects growth of up to 3%, and HCLTech expects 2% to 5% growth.

Notably, firms are offering wider guidance bands than usual, reflecting the heightened macroeconomic uncertainty. While margin guidance has remained stable — Infosys and HCL Technologies retained their FY26 operating margin projections — topline growth remains a key concern.

FY25 was a tough year for the sector. HCL Technologies posted the highest revenue growth among the top firms at 4.7%, followed by Infosys and TCS at 4.2%. Wipro, however, struggled, ending the year with two consecutive quarters of revenue decline.

Disclaimer: The above article is purely for informational purposes and should not be considered investment advice from Upstox. Please consult with a financial advisor before taking any investment decisions.