MOSL: ZENSAR TECHNOLOGIES (Buy)- Waiting for the big guns to start firing

​Zensar Technologies:Waiting for the big guns to start firing

(ZENT IN, Mkt Cap USD0.5b, CMP INR835, TP INR1020, 22% Upside, Buy)

• Revenue beat despite IM weakness: ZENT's 3.3% QoQ CC growth was higher than our estimate of +2.3%. In USD terms, revenue grew 3.8% QoQ to USD119m. While Application Services grew 5.2% QoQ CC, a decline in Infrastructure Management (IM) dragged growth lower. EBITDA margin expanded 140bp QoQ to 11.6%, despite a wage hike impact of -150bp; apart from other factors, a decline of 150bp on headcount resulted in a 300bp increase in utilization. PAT at INR608m (13.6% YoY) was better than our estimate of INR543m, led by the overall operational beat.
  
• Smaller bits driving growth: 90% of incremental growth in 2QFY18 was driven by geographies other than the US. Performance in the US (72% of revenue) has been weak for more than a year, and the front-end here recently saw a refresh. Although growth in several pockets has been strong enough to offset this weakness this quarter, it would be necessary for the US to start pumping in order for the overall performance to look decently upward.
  
• Margins thesis not playing out yet: While there was a beat on profitability during the quarter, segmental disclosures indicate -3.4% EBIT margins in IM - a deterioration of 640bp QoQ. Our margin improvement thesis is hinged on course correction in this business, giving the company a potential delta of 200bp from this lever alone. However, management commentary indicated that a positive change in this metric would still be a couple of quarters away.