FREE

MOSL: TECHNOLOGY 2QFY19 PREVIEW-Two propitious strokes – one of order, the other of luck

Technology 2QFY19 PREVIEW: Two propitious strokes – one of order, the other of luck

 

• The usual second-quarter seasonal strength, coupled with the benefits from a favorable currency, is likely to drive a continued recovery for the technology sector.
• Revenue for Tier-I vendors is likely to increase by 9.4% YoY in constant currency terms (compared to 7.8% in 1QFY19 and 6.8% in 2QFY18), taking further strides toward entering a double-digit growth trajectory.
• INR depreciation and an improved performance are likely to act as margin tailwinds, driving stronger EBITDA growth. Also, with lower hedge gains being more than offset by sharp translation gains, PAT growth would come in even better.
• Growth and profitability trends are likely to be polarized, with USD revenue/EBITDA/PAT growth expected to be at 7%/18%/18% YoY for Tier-I and 15%/37%/45% YoY for Tier-II.
• Bottoming cyclical pressures will feed into valuation multiples favorably, while supportive currency movements will underpin earnings growth, in our view.

 Expect uptrend in growth to continue

• The continued upward trajectory reinforces the outlook for Indian technology services. Considering the improving demand outlook, resonated in a pick-up in deal wins and more-so in commentary across verticals (especially in the crucial ones like BFSI) and supported by seasonal strength, we expect Tier-I to deliver CC revenue growth of 9.4% YoY for 2QFY19, as against 7.8% in 1QFY19 and 6.8% in 2QFY18.
• TCS is expected to deliver double-digit growth (12% YoY CC) this quarter. Other Tier-I vendors are expected to exhibit 150-300bp improvement in YoY growth rates in 2QFY19. For WPRO and HCLT, organic growth is expected to linger in the low-to-mid single-digit range.