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MOSL: TECHNOLOGY 4QFY20 PREVIEW-Expect COVID-19 uncertainty to overshadow 4Q results

TECHNOLOGY 4QFY20 PREVIEW:

Growth/margins to be impacted across most companies
** We expect MOFSL coverage universe to post revenue (USD) / EBIT (INR) / PAT to grow 6%/4%/-2% YoY in 4Q.

** On a sequential basis, Tier I revenue should move in the range of (0.5)%-1.3% (CC) and (1.7)%-0.6% (USD) with HCLT/TechM leading/lagging the pack.

** Across Tier II, revenue should move in the range of (2.5)%-3% (CC) and (3.2)%-2.5% (USD) with LTI/Cyient leading/lagging the group.

** While we expect EBIT margins of Tier I to contract to the tune of 20-40bp (QoQ), margins of our Tier II coverage should move in the range of (80)-420bp.

** Second half of 4QFY20 witnessed varying levels of COVID-19 disruption across most of the core markets of IT companies like the US, Europe and even India.

** Most of our coverage companies did a reasonable job in controlling the damage by resorting to options like 'work from home'.

** However, it should be noted that not all service offerings are amenable to be delivered from home for a variety of reasons. In conjunction with lower productivity, both billing and utilizations in 4Q should witness an impact.

Expect guidance on FY21 growth/margins to be delayed
** Given the unprecedented level of uncertainty around the global macro and the multiple moving parts, visibility on near-term growth/profitability is challenged.

** Accordingly, we expect companies like Infosys/HCLT to delay their FY21 growth/margin guidance to the subsequent quarters.

** Even if they were to guide, these guidance bands will likely be wider than usual and subject to sharp revisions later on as clients relook at their IT budgets.

** In that context, deal signings during 4Q (especially in the second half) will likely be a key area of investor focus as it is the latest available proxy for demand.