In June 2025, IT stocks in India have staged a remarkable recovery, outpacing the benchmark NIFTY50 index by a significant margin. The NIFTY IT index, tracking top IT companies listed on the National Stock Exchange, surged by 4.58% this month, compared to a modest 0.25% gain in the NIFTY50. This rally follows a period of sharp corrections, with investors now drawn to attractive valuations. However, global brokerages Morgan Stanley and CLSA present contrasting outlooks, reflecting uncertainty about the sector’s medium-term trajectory.
Why Are IT Stocks Rallying?
The rebound in IT shares comes after a consolidation phase triggered by subdued Q4FY25 results and conservative revenue guidance from major players. Analysts attribute the rally to:
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Valuation Comfort: After months of corrections, IT stocks are trading at more appealing price-to-earnings ratios, enticing value investors.
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Investor Optimism: Positive price action signals renewed confidence in the sector’s long-term growth potential.
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Selective Demand Recovery: While discretionary spending remains weak, sectors like BFSI (banking, financial services, and insurance) show robust demand, supporting selective IT firms.
Despite the rally, the sector faces challenges, including macroeconomic uncertainty, muted discretionary spending, and selective vendor consolidation.
Morgan Stanley’s Cautious Optimism
Morgan Stanley maintains a guarded outlook on the IT sector, citing a slight improvement in revenue growth expectations but warning of a prolonged slowdown. Key points from their analysis include:
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Muted Growth Forecast: The brokerage predicts two years of low compound annual revenue growth (CAGR) due to weak discretionary spending.
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Profit-Booking Opportunity: Morgan Stanley views the current rally as a chance to book profits rather than chase further upside, as valuations in some cases have outpaced fundamentals.
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Macro Challenges: Persistent global economic uncertainty and selective vendor consolidation continue to weigh on the sector.
Morgan Stanley advises investors to remain cautious, emphasizing that deal pipelines and management commentary indicate only modest improvements.
CLSA’s Bullish V-Shaped Recovery Outlook
In contrast, CLSA adopts a more optimistic stance, forecasting a V-shaped recovery in IT spending over the coming quarters. Their key observations include:
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Emerging Green Shoots: Despite macro headwinds, CLSA sees early signs of demand recovery, particularly in BFSI.
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Cost Optimization and Consolidation: Medium-term momentum is expected from cost-saving initiatives and vendor consolidation trends.
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Selective Opportunities: While BFSI remains a bright spot, other verticals like retail and manufacturing lag, creating a mixed demand environment.
CLSA’s bullish outlook hinges on improving IT budgets and a gradual easing of macroeconomic pressures.
Subdued Management Guidance
The optimism in stock prices contrasts with cautious guidance from IT companies. Major players have issued conservative revenue forecasts for Q1FY26 (April–June 2025):
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Wipro: Expects a revenue decline of -3.5% to -1.5%.
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Infosys: Projects growth of up to 3%.
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HCLTech: Anticipates 2% to 5% growth.
Firms are issuing wider guidance bands, reflecting uncertainty driven by global economic challenges. While margin guidance remains stable—Infosys and HCLTech retained their FY26 operating margin projections—topline growth remains a concern.
FY25: A Challenging Year for IT
The IT sector faced significant headwinds in FY25. Among top firms:
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HCL Technologies led with 4.7% revenue growth.
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Infosys and TCS followed closely at 4.2%.
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Wipro struggled, posting two consecutive quarters of revenue decline.
These results highlight the uneven performance across the sector, with some firms better navigating the challenging demand environment.
Investment Takeaways
The rally in IT stocks offers opportunities but comes with risks. Investors should consider:
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Valuation Discipline: Focus on companies with strong fundamentals and reasonable valuations to avoid overpaying.
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Sector-Specific Trends: BFSI-driven demand could benefit firms with exposure to this vertical, such as TCS and Infosys.
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Brokerage Insights: Weigh Morgan Stanley’s caution against CLSA’s optimism to align investments with risk tolerance.
Conclusion
The IT sector’s outperformance in June 2025 reflects renewed investor interest fueled by attractive valuations. However, the divergence between Morgan Stanley’s cautious stance and CLSA’s bullish outlook underscores the uncertainty surrounding the sector’s recovery. With subdued management guidance and macroeconomic challenges persisting, investors must tread carefully, balancing optimism with vigilance.
For those looking to capitalize on this rally, staying informed about company-specific guidance, vertical-specific demand trends, and global economic developments will be key to making well-informed investment decisions.
Disclaimer: This blog is for informational purposes only and not investment advice. Always consult a financial advisor before making investment decisions.
