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MOSL: TECHNOLOGY 1QFY19 PREVIEW: Expect polarization in seasonally strong quarter

Technology 1QFY19 PREVIEW: Expect polarization in seasonally strong quarter

 

• The usual 1Q seasonal strength coupled with benefits from currency are expected to result in continued recovery for the sector.
• Growth trends however are likely to be polarized with USD revenue growth for Tier-I expected at 8% YoY and that for Tier-II at 16% YoY.
• INR depreciation and improved performance provide margin tailwinds and drive our expectations of 18% YoY EBITDA growth for the sector.
• However, lower foreign exchange gains would result in 14% PAT growth. TCS, which alone constitutes to 40% of the sector’s PAT will drive 60% of the incremental profits in 1QFY19.
• Bottoming cyclical pressures and improved capital allocation are factors that will feed into valuation multiples favorably whereas currency keeps earnings growth ticking further.

 Seasonal strength and currency benefits

• While the glory days for IT are far from back, valuations are back to the past ranges for large IT and in a new territory for tier-II IT. The valuations this time around are a combination of: [1] Bottoming of cyclical pressures, [2] Greater hopes from Digital, [3] Improved capital allocation by multiple companies, and [4] Currency’s new zone that drives greater earnings comfort.
• Against this backdrop, seasonally strong 1Q pattern needs to be kept intact, and the benefits from currency need to percolate down to operating profits. We are not expecting any disappointment on either front.