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MOSL: TECHNOLOGY: The Twin Dichotomy: Margin-Revenue | Macro-micro; Expect polarized valuations to sustain

TECHNOLOGY: The Twin Dichotomy: Margin-Revenue | Macro-micro; Expect polarized valuations to sustain

 

• Indian IT Services companies' earnings estimates post 1QFY20 have been revised downward against the backdrop of continued supply crunch and its impact of profitability. However, some encouraging trends - sanguine demand and USD appreciation - have waded through the sporadic pockets of weakness, providing some comfort. That said, further weakening of global macros will likely mar steady growth momentum of IT companies, reversing the growth-margin dichotomy (from strong-growth-weak-margin to weak-growth-strong-margins).
• Historically, long-term valuation multiples of IT companies have had a correlation to bond yields and also to the INR/USD levels. However, the recent turn of global events have pushed the yields to an all-time low (1.48%) and led to appreciation of the USD v/s the INR, suggesting the coexistence of forces that may exert a pull on valuations in opposite directions.
• With growth rates receding but RoICs remaining well above the hurdle rates, capital allocation policies are being tweaked, with larger amounts of cash reserves being paid out to investors. This understandably makes IT companies sound defensive bets in volatile times, but contrasts the growth value that the industry enjoyed for the better part of the last decade and early part of this decade too.