MOSL: ZENSAR TECHNOLOGIES (Buy)-Just one piece left to fit now

Zensar Technologies: Just one piece left to fit now

(ZENT IN, Mkt Cap USD0.6b, CMP INR910, TP INR1100, 21% Upside, Buy)

• Revenue beat in a seasonally weak quarter: ZENT’s 3.4% QoQ growth was above our estimate of +1.5%. Strong growth despite seasonal weakness was led by 9% QoQ growth in Digital, which now constitutes 39% of total revenue. Gross/EBITDA margin expansion of 130/170bp was mainly driven by higher growth from Digital and efficiencies led by internal deployment of its Return on Digital proposition. PAT of INR574m (-5.7% QoQ) bettered our estimate of INR549m (-9.7% QoQ), led by the overall operational beat.
• Restructuring proof-points trending well…: Besides revenue growth, validation of ZENT’s reformed offerings comes from its USD100m TCV deal wins, most of which are in Digital. It has also infused these offerings in its top customer, making the otherwise traditional IT support account more balanced. Vinci, its autonomics offering in Infrastructure, is running pilots with multiple customers, which are likely to convert into deals over coming quarters, propelling the services business in IM, which grew 7.5% QoQ in 3Q.
• …MVS still a WIP: The maintenance business in IM declined in 3Q, as the company aims to resurrect profitability in this piece. Progress on this, combined with continued strength in services, would be key to boosting IM profitability from -3.7% currently at EBIT level and in turn improving overall margin, which, in our view, has headroom of 200bp only from this lever.