MOSL: ZENSAR TECHNOLOGIES (Buy)-In-line-reported margin impacted by one-time provisioning

ZENSAR TECHNOLOGIES: In-line; reported margin impacted by one-time provisioning

(ZENT IN, Mkt Cap USD0.8b, CMP INR1208, TP INR1400, 16% Upside, Buy)

• Encouraging traction in Digital and the US: ZENT's 3.3% QoQ growth was in line with expectations. However, CC revenue growth was 1% v/s estimate of 1.9%, while tailwinds from cross-currency were stronger. 7% QoQ growth in Applications was partly offset by a 15% sequential decline in IMS. Digital continued exhibiting strength, growing at 8% QoQ. It now constitutes 41% of total revenue. Revenue in the US grew 3% YoY in FY18. However, in 4Q, its YoY growth was 10.8% YoY - a clear indication of momentum pick-up.
• Margin was in-line excluding one-time provision: EBITDA margin shrunk 150bp QoQ to 11.8%, as against flattish expectations. However, adjusted for the write-down taken against a retail customer, which filed for chapter 7, profitability for the quarter was in line. This was despite higher subcontracting expenses (which grew by 200bp) due to its execution in the largest-ever deal. Margin improved in IMS (+310bp), while that in Applications deteriorated by 340bp. PAT at INR726m was above expectations because of higher-than-estimated other income.
• Notable progress on its objectives: Whether it is scaling of focus areas such as Digital and top clients or ramping down the non-core, ZENT has demonstrated healthy execution in FY18. Traction in the US is starting to build up after the restructuring, with announcements of two large deals. That, along with business from Cynosure, should add on to the base set in FY18, and help drive an improvement in revenue growth. Also, scaling down of the MVS and Products segments in IMS should help drive profitability.