MOSL: TECHNOLOGY 2QFY18 PREVIEW-Keeping expectations low as US continues to drag

​TECHNOLOGY 2QFY18 PREVIEW: Keeping expectations low as US continues to drag

• Familiar story – weakness despite seasonal strength: The seasonal strength of 1Q was watered down by a delay in BFS recovery, which most companies were hoping for to drive an improved performance for the year. Any revival in spend – albeit there have been increased discussions on ground and positive business sentiment across the US – appears elusive. Continued softness in BFS, combined with troubles in Retail, drive our expectation of 1.0-2.2% QoQ CC growth for 2QFY18.
  
• The shade is darker if adjusted for acquisitions: Deceleration of growth has been steady, and 2Q is expected to clock aggregate YoY CC growth of 8.0% (v/s 9.4% in the year-ago period). However, this is aided by several acquisitions, especially across Wipro and HCL Tech, excluding which, aggregate growth lands up at 5.5% YoY CC (v/s 7.7% in 2Q last year). On an organic constant currency basis, we see YoY growth to be the lowest at Wipro (1.0% YoY CC) and to have come off the most for HCL Tech (4.3% YoY in 2QFY18 versus 9.9% in 2QFY17).
  
• Mid-caps seeing stronger growth: We see double-digit growth at Persistent (12.0% YoY), Hexaware (13.7% YoY), Cyient (10.1% YoY) and LTI (11.1% YoY). The four have been seeing continued traction, led by company-specific and client-specific dynamics. This puts the second tier higher on the revenue scorecard compared to Tier-I. However, the gravity of profitability erosion has been stronger for Tier-II.
  
• Cross-currency tailwind to offer some respite to dollar growth…: With EUR and GBP appreciating 6.7% QoQ and 2.2% QoQ, respectively, against the USD, we see ~100bp tailwind in reported QoQ dollar revenue growth. HCLT, TECHM, CYL and NITEC should be the larger beneficiaries, given their exposures to the EUR.