MOSL: ZENSAR TECHNOLOGIES (Buy)-Two steps ahead, one step back-Profitability bogged down by restructuring

​Zensar Technologies: Two steps ahead, one step back; Profitability bogged down by restructuring

(ZENT IN, Mkt Cap USD0.6b, CMP INR835, TP INR1020, 22% Upside, Buy)

• Revenue decline led by ramp-up delays: ZENT’s 4QFY17 revenue declined 4.9% QoQ (est. of +2.7%) to USD112m. The decline was led by absence of Product revenue (~USD8m), which sees a bump-up in 3Q, and delays in ramp-ups leading to some right-shifting of revenue. While this resulted in a 26% decline in IM revenue (19% of total), the Applications business was stable (+1.7% QoQ). Due to a weak 4Q and ongoing reconstitution of the business, FY17 revenue grew by 3.5% YoY CC.
  
• Restructuring takes a toll on margins: EBITDA margin contracted 450bp QoQ to 9.3%, led by [1] restructuring in Multi-vendor services (MVS) business (~USD3m), [2] pricing decline in some large customers (USD1.6m) and [3] one-time expense of USD2m related to property taxes and provisioning for Indian government projects. Even after excluding one-offs, margins shrunk 270bp QoQ to 11.1%. PAT at INR217m declined 73.3% QoQ.
  
• Dismal headline, strong undercurrents: Several phases of ZENT’s restructuring have been under execution, with progress seen in account mining, launch of new services, thrust on Digital, addition of leadership, revamping of sales function and pruning of non-core businesses. This has taken a toll on FY17 results, with revenue growth of 3.5% YoY CC and margin contraction of 160bp. While headline numbers look dismal, the underlying signs of strategy execution remain encouraging.