IT services stocks set for turnaround

Indian IT services stocks are set for a turnaround in 2018 as recovery in spending is "imminent", says a Morgan Stanley report.

The IT sector underperformed the Sensex in 2017 as revenue growth was tepid, while investment in the business and a strong rupee kept margins in check.

According to the global financial services major, a turnaround in IT spending could quickly turn sentiment on these stocks.

Though the sector faces risks from automation and a slower pace of market share gains from global vendors, a cyclical rally could be in the offing, it added.

As per Morgan Stanley's January-2018 proprietary global CIO survey, an acceleration in IT services growth relative to 2017 is likely.

Moreover, recent deal announcements by companies (such as the $2.25 billion deal win by TCS last month) indicate potential conversion of deal pipelines.

"Valuations are at or below long-term averages and an improving global macro could spur tech spending, which could re-rate stocks," Morgan Stanley report said, adding that the industry looks "attractive".

The report further noted that push out in tech spends could hurt stock performance. Further, rupee appreciation is a margin headwind and any renewed concerns on regulations, especially visas, or new US tax laws could hurt sentiments.