Morgan Stanley Sees Tech Spending Boost For TCS To Tech Mahindra, Initiates Coverage

Having shifted their business mix aggressively towards digital, Indian IT companies are positioned well to cash in as spending on technology in the next 10 years is expected to be more than in the previous two decades, according to Morgan Stanley.

The research firm initiated coverage on five Indian technology stocks: Tata Consultancy Services Ltd., Wipro Ltd., Infosys Ltd., Tech Mahindra Ltd. and HCL Technologies Ltd.

Covid-19 has accelerated tech migration, as reflected in the higher shift to public cloud in 2020 versus the previous two years, Morgan Stanley said in a note. It sees margin tailwinds from a distributed delivery model, providing more headroom to make investments and drive market share gains in the next three years.

The sector’s order booking remained strong even during the pandemic, leaving room for “positive surprises on revenue growth over the coming quarters”, the note said.

While valuation multiples of these stocks are close to historical peaks, they will still be supported by better revenue growth outlook, better capital allocation and return ratio profile, and improvement in global tech multiples, it said.

Yet, contrary to the market consensus, earnings upgrades are unlikely given potential risks to near-term margin assumptions, Morgan Stanley said. “Higher-than-expected wage inflation and rising attrition trends (also seen during the global financial crisis recovery) and the companies’ focus on accelerating market share gains over margins will lead to disappointment on margins in the near term.”

Morgan Stanley’s take on the five stocks:

TCS And Infosys:

  • Morgan Stanley is overweight on TCS and Infosys.

  • Expects them to narrow the valuation gap with global peers such as Accenture.

  • Revenue surprises could offset margin misses at these firms.

  • Among larger companies, TCS and Infosys have announced more deals where they deploy their own platforms, products and IP offerings.

  • That will provide them not only a competitive edge but also client stickiness, positioning them to drive market share gains.

  • Near-term strong order booking along with good pipelines provide comfort around their ability to drive upside surprises to revenue expectations.

HCL Tech And Tech Mahindra

  • Even weight on HCL Tech and Tech Mahindra; valuation discount for these two will remain high as growth lags that of peers’.

  • HCL Tech’s management has guided for a year-on-year revenue growth of at least 10% in FY22. This is lower than Morgan Stanley’s expectations for its peers such as Infosys and TCS.

  • The company is using the current opportunity to invest in new geographies.

  • Morgan Stanley expects HCL Tech to remain in an investment phase and margins to decline year-on-year.

  • Tech Mahindra’s high exposure to the communications vertical remains a key drag on its growth.

  • Potential 5G capex is likely to benefit Tech Mahindra but there has been uncertainty around timing.

  • Within the enterprise vertical, the company has lagged peers due to client-specific challenges and high exposure to auto/aerospace, the verticals impacted by Covid-19.

  • Expects Tech Mahindra’s organic revenue growth to lag.


  • Underweight on Wipro given its small valuation discount to Infosys when revenue growth continues to lag and the acquisition is expected to drag earnings.

  • The Street is extrapolating consistency in performance over the coming quarters. But Morgan Stanley expects volatility in its growth trajectory, given exposure to project-related and R&D business.

  • Margins could surprise on the downside owing to the recently announced acquisitions.

  • The integration risk of a large M&A is not priced in.

  • Historical data suggests that the integration of onsite consulting businesses with India IT services models has been challenging.

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