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MOSL:TECHNOLOGY | 1QFY23 PREVIEW: 1Q dragged by margin and cross currency headwinds.

Management commentary on demand remains under focus

• Our IT Services coverage universe should witness modest median revenue growth in 1QFY23E (up 3.3% QoQ in CC terms and 14.3% YoY). Growth in EBIT/ PAT (-1%/-2.8% QoQ) should be impacted by wage hikes and supply-side pressure, despite a depreciation in the INR against the USD.
• We will be watchful of any moderation in the demand commentary across both Tier I and Tier II companies in the IT Services space. While our recent discussions with managements indicate continued momentum in spends on technology services, we expect initial signs of an impact in sectors like Retail and Manufacturing in 1QFY23. The growth deficit in Tier I players v/s Tier II peers will further narrow in 1QFY23. We see a limited change in the FY23 revenue growth guidance of INFO, HCLT, COFORGE, and LTTS in 1Q, given the unchanged demand commentary and this being the first quarter.
• Tier I companies should deliver revenue growth in a narrow range (2.3-3.9% QoQ CC). Tier II players will grow in the 1.9-5.3% range, excluding PSYS, which will grow by 9.5% QoQ due to a meaningful contribution from recent acquisitions. Reported USD growth will be hit by 1-2% due to significant appreciation in the EUR/GPB against the USD in 1QFY23.
• While the long-term demand environment remains unaltered, we anticipate an impact in 2HFY23 and FY24 due to elevated inflation and an economic slowdown in both the US and Europe. We are trimming our FY23/FY24 INR EPS by 2-5%, despite a positive 300-400bp impact from a lower INR (79/USD). The impact on earnings will accrue from weaker revenue growth as we continue to see support to margins from a large fresher intake and a partial price increase.
• The commentary on demand, the impact of an upward price revision, and a weakening macro-economic outlook on deal conversion will be key monitorables to look for.

INFO/PSYS to lead revenue growth within the Tier I/midcap space

• We expect Tier I IT organic revenue growth to be in a narrow band, with INFO leading with a revenue growth of 3.9% QoQ CC, followed by TCS/HCLT at 3.4%/ 3.3%. TECHM/WPRO is expected to deliver 2.8%/2.3% QoQ CC growth.
• Among Tier II players, we expect good revenue traction at PSYS (up 9.5% QoQ CC), buoyed by gains of ~470bp from recent acquisitions. We expect COFORGE/ MTCL to grow by ~5.3%/4.6% QoQ CC in 1QFY23.