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MOSL: TECHNOLOGY-2QFY19 - Hits, Misses and Key Trends

TECHNOLOGY: 2QFY19 - Hits, Misses and Key Trends

 

• In the quarter gone by, organic constant currency revenue growth accelerated for the fourth consecutive quarter, on expected lines. While TCS drove the growth, material contributions also came in from INFO and WPRO.
• Against expectations of a strong 2QFY19, backed by the combination of seasonality and cyclical impetus, there were instances of revenue miss across a few companies outside the large cap IT (TECM, MTCL, HEXW, PSYS) stocks; while only NITEC surprised positively.
• Currency's support to margins was reflected in beat at WPRO, TECHM, KPIT, NITEC and PSYS, while only MPHL's margins missed estimates by more than 50bp.
• Uptick in retail across the larger companies, secular strength in E&U and Europe were key positive trends. On the flip side, growth rates in Telecom softened a bit (INFO and TECHM expect this to pick up based on order book visibility).
• Tier-I restored its margin delta during the quarter, which had hit its lowest level in eight years in 1QFY19.
• Given the order book across the board, we expect a partial offset to weak 3Q seasonality and continued acceleration in revenue growth on an aggregate level. On the other hand, we will keep a close eye on the margins given the appetite for Digital investments and sporadic comments of tight market for local labor in the US.
• We prefer INFO and TECHM in tier-I; and MTCL, ZENT, PSYS and KPIT in tier-II IT.