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MOSL: TECHNOLOGY 4QFY19 Preview-Tier-I marches on; Account-specific stress to drag multiple Tier-II companies

Technology 4QFY19 Preview: Tier-I marches on; Account-specific stress to drag multiple Tier-II companies

 

Expect unanimous acceleration in YoY growth to pause after four quarters

  • With aggregate Tier-I CC revenue growth of 10.3% YoY in 4QFY19, we expect the trend of unanimous acceleration to soften after five quarters. While growth rate at INFO and HCLT will continue accelerating, for TCS and TECHM, YoY growth should be comparable to the previous quarter, and acceleration at WPRO should be marginal. For TECHM, Enterprise will be a drag and weaker-than-anticipated 4Q seasonality should play out for Communications.
  • While currently companies are not worried about deteriorating macros, most firms have cited some weak pockets, which may potentially impact performances in future quarters.
  • For Tier-II, client-specific issues will drag 4QFY19 performance across companies such as LTI, PSYS, CYL, and TELX; while the supply situation will continue to weigh on margins at MTCL and HEXW.
  • We expect aggregate INR revenue growth to be 17.7% YoY, while EBTDA is expected to grow 18.1% YoY. PAT growth is expected to be at 12.6% YoY. 

Expect HCLT to lead QoQ growth in Tier-I; MPHL and NITEC to continue growth momentum among Tier-II companies

  • At 3% QoQ CC, we expect HCLT to lead the growth in Tier-I due to continued traction in IMS backed by its double-digit sequential growth in 3Q.
  • While INFO struggled to grow in 4Q in the past, the ramp-up in large Communication deals should help them circumvent the same this fiscal. We expect 2.3% QoQ CC growth.
  • We expect WPRO to grow in the upper half of its 0-2% guidance band at 1.5%, and expect 2% QoQ CC growth for TCS.
  • While TECHM usually experiences seasonality from its Telecom products’ segment in 4Q, the same may not be a strong tailwind; we expect 2% QoQ CC growth. Enterprise should be soft on the high base of 3QFY19 growth in Manufacturing and Retail, pegging our estimate at 1%, and overall company at 1.5% QoQ CC.
  • Among Tier-II IT companies, momentum for revenues should sustain at NITEC (3% QoQ CC) and MPHL (3.8% QoQ CC). LTI will be dragged by pressures in top BFS accounts; PSYS by weak IP revenues and CYL by deferred ramp-ups in services and regulatory delays in DLM contracts. MTCL should improve growth from 2.5% in the previous quarter (+3.1% QoQ CC) and March quarter’s seasonality should weigh on HEXW (+2.5% QoQ CC).
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Motilal Oswal
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