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MOSL: ZENSAR (Downgrade to Neutral)-Industry level growth and margins some time away

Zensar: Industry level growth and margins some time away

(ZENT IN, Mkt Cap USD0.6b, CMP INR174, TP INR180, 3% Upside, Downgrade to Neutral)

 

Expect a weak FY21

• Zensar's continued underperformance in growth and profitability was driven by execution challenges and ongoing restructuring. As impact of the restructuring is expected to continue for some more time, we do not expect Zensar to reach industry level growth before FY22. Adjusted for seasonal factors (e.g. wage hikes, etc.), we expect EBITDA margins to remain flat at ~11% in FY21 before improving ~200bp in FY22.
• We downgrade our EPS estimate over FY20-22E by 25-47% given the sharp reset in revenue growth and margin trajectory. Downgrade to Neutral. 

Sharp decline in revenue and drop in margins

• 3QFY20 revenue at USD143m declined 6% YoY (v/s est. 10% YoY), EBIT at INR284m plunged 70% YoY (v/s est. 28% YoY), while PAT at INR397m decreased 32% YoY (v/s est. 55% YoY).
• In CC terms, revenue declined ~6.4% QoQ to USD143m. The sharp decline can be largely attributed to (1) one-time tail account ramp downs in retail, (2) furloughs, and (3) year-end volume discounts.
• Besides retail, most other verticals also reported sequential decline due to the furlough impact. Hi-tech declined 2.6% QoQ, Manufacturing declined 3.9% QoQ and Insurance declined 8.8% QoQ.
• Among service lines, sharp decline in Core Application services (~17.3% QoQ) was a major driver of overall revenue decline.
• All the three geographies - the US, Europe and Africa - more or less contributed equally to the revenue decline. While the furlough impact is usually witnessed in the US, this time it was felt across geographies.