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MOSL: TECHNOLOGY 4QFY18 PREVIEW- Looking on expectantly-Gradual growth uptick, tier-2’s outperformance to sustain

Technology 4QFY18 PREVIEW: Looking on expectantly; Gradual growth uptick, tier-2’s outperformance to sustain

 

Expect the gradual, albeit marginal, growth uptick to continue

• Our recent report on the sector discussed the cyclical impetus in CY18 that is likely to drive some revenue acceleration in FY19, even as the structural challenges prevail. A strong exit from FY18 will only fuel that thesis further, especially given the usual weakness associated with 4Q, with client focus on freezing budgets for the best part of 4Q's first month and a half.
• "Strong", therefore, should be taken in that context - whereby sequential growth will be contained, but YoY trajectory may continue to inch up. We expect such acceleration in INFO, TCS and TECHM, and also organically for WPRO - across our top-tier universe. Corresponding aggregate QoQ growth is pegged at 2.9% (~2% in constant currency and 80-120bp tailwind from cross currency). TCS, with its recent deal wins, and HCLT, with anticipated IMS recovery, should lead the pack at 2-2.2% QoQ CC revenue growth.

 Tier-2's outperformance to sustain (ex-PSYS)

• We expect aggregate USD revenue growth of 3.5% QoQ across tier-2 IT, 60bp higher than tier-1, despite modeling 5% QoQ decline in PSYS revenues (post the company's update of anticipated 8m decline in IP revenues).
• This will be led by: [1] Cyient (+8.8% QoQ), where boost will come from Rangsons, [2] LTI (+4% QoQ), which should continue delivering on its expectation of better 2H v/s 1H, and [3] MTCL (+4.3% QoQ), where the revenue performance is expected to be similar to 3Q. While ZENT should continue demonstrating recovery on multiple fronts (US, IMS, Digital Consumer), the focus away from MVS and products in IMS may weigh on overall revenue.