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MOSL: TECHNOLOGY-Uneasy valuations divergence-Examining the recent premium in some companies’ valuations

​TECHNOLOGY: Uneasy valuations divergence; Examining the recent premium in some companies’ valuations

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• ​Over the last couple of months following the full-year earnings announcements, we observe significant divergence in valuation multiples among top-tier peers and also among the tier-II counterparts, widening the band range for valuations.
  
• While explicable in some cases, there are instances that confound us, notably: [1] TCS' 19-33% premium over tier-I peers and 8% premium over CTSH, [2] WPRO's 6% premium to INFO, despite the former braced for revenue decline in 1Q, following 410bp EBIT margin decline over FY15-17, and [3] breaking away of MTCL, MPHL and HEXW from PSYS, CYL and ZENT, though the latter set is not lagging in fundamentals / earnings growth expectations. We are positive on all the three names in the latter set.
  
• The unsettling debacle between the Board and the promoters has hurt INFO's relative valuations, cessation of which might just be the beginning of a round of catch-up by INFO with both WPRO and TCS.
  
• HCLT's 20% premium to TECHM is also worth a mention. TECHM's margin shock in 4Q contrasted HCLT's steady expectations, explaining the discount. However, the likely improvement in trajectory starting 2QFY18 could be an upside trigger at TECHM, whereas HCLT's margins would do well to sustain at current levels amid multiple acquisitions that would get integrated.