MOSL: TECHNOLOGY 3QFY18 PREVIEW-Hope beyond seasonality–Faces the same-old policy overhang

​TECHNOLOGY 3QFY18 PREVIEW: Hope beyond seasonality; Faces the same-old policy overhang

New Year, same-old duel

• Commentaries around Digital-led revenue momentum have been the key highlight in a quarter of muted activity, raising hopes of a revenue growth recovery in CY18. Increasing base of new technology revenues aiding credible references, industrialization of Digital, and expectations of higher investments by US companies post tax cuts all favorably feed to the recovery theory.
  
• However, the industry has not been spared from policy overhangs, which continue to be closely monitored. The BEAT clause in the US tax bill has created uncertainty around companies operating under the subsidiary model with material transfer pricing (TCS, HCLT, CTSH and Captives). Also, the H.R.170 bill that primarily affects ‘H-1B dependent’ companies passed the House Judiciary Committee in November – it defines dependent companies as those where H-1B workers account for more than 20% of the workforce.
  

Expect muted 3Q growth bar exceptions…

• Seasonality will sit on top of a fairly muted year for Indian IT, weighing on the sector’s revenue performance in 3QFY18. We expect LTI to buck the trends and report 3.2% revenue growth QoQ, following its outlook of a better 2H as deals ramp up. PSYS should follow with seasonality in its IBM IoT deal, driving our expectation of 3.3% QoQ growth in revenues.
  
• We expect top-tier companies to grow 0.9%-2.5% QoQ in the quarter, led by TECHM. Among the remaining tier-II universe, CYL may witness some revenue decline due to a combination of furloughs and lumpiness in its design-led manufacturing segment.