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MOSL: TECHNOLOGY 3QFY19 PREVIEW-Could macro play a spoilsport in 2019?

Technology 3QFY19 PREVIEW: Could macro play a spoilsport in 2019?

 

Demand commentary will be keenly watched

• Gradually improving YoY growth rates, anticipated continuum of the same in 3QFY19 and a strong order book have all been indicators of secular strength in demand for IT Services. Aggregate YoY Revenue / EBITDA / PAT growth across our coverage universe is to be 20% / 23% / 13%. Like the last quarter, TCS is expected to drive growth in incremental PAT, YoY at 63%.
• However, multiple factors thwart the continuity of the same going into CY19, with potential causes of client caution being (a) a slowdown of US macro, (b) escalation of the US-China trade war and (c) immediate ramifications of Brexit.
• Commentaries by companies across the board and Accenture’s 1QFY19 performance indicate a status quo on business thus far. However, we believe that commentaries on client budgets will likely lend more clarity on the possible influence of the aforementioned factors.

 

Expect acceleration in YoY growth, HCLT to lead sequential growth

• Growth is expected to continue accelerating into 3QFY19 (our estimate: 8.9% YoY CC), contributed by good progress at each of the top-5 clients. We expect 11.7% YoY growth at TCS – the highest among tier-I – while TECHM should lag with 4.7% YoY CC growth, given sluggish momentum in Communications. We expect growth at INFO to accelerate to 9% YoY CC from 8.1% in 2QFY19.
• On a sequential basis, HCLT is expected to lead growth at 4.5% QoQ CC, aided by contribution from H&D, latest IP addition, ramp-up of large deals such as Nokia, and seasonality in IP revenues. Other companies are expected to deliver growth in the range of 1.4-2.6% QoQ CC.
• YoY USD revenue growth in tier-II is expected to be led by MTCL (17.3% YoY), followed by ZENT (15.9% YoY). We expect PSYS to lag with a 1.7% YoY decline due to continued challenges on sales execution and low probability of 3Q seasonal strength in IPs playing out (unlike previous years).