MOSL: ZENSAR TECHNOLOGIES (Neutral)-Legacy pressures offset Digital pivot

​Zensar Technologies: Legacy pressures offset Digital pivot

(ZENT IN, Mkt Cap USD0.6b, CMP INR830, TP INR950, 15% Upside, Buy)

• Revenue growth led by Keystone: ZENT’s 1QFY18 revenue grew 2.5% QoQ CC, as against our estimate of +5.3%. The quarter also included incremental revenue of ~USD5m from the integration of Keystone, implying organic revenue decline of ~2%. Pressure in the organic business was led by ramp-down in Oracle ATG implementations, delays in the Manufacturing vertical deal ramp-ups, and conscious rationalizing of the RoW portfolio.
• Margin uptick capped despite exercise of levers: EBITDA margin expanded 230bp QoQ to 10.2% post a drastic 600bp contraction seen in the previous quarter. Full recovery was not seen in margins, despite the presence of several one-off costs in the previous quarter, improved utilization (+400bp) and higher offshoring (+300bp). Led by the overall operational miss, PAT at INR472m was down 36.3% YoY, compared to our estimate of INR558m (-26.8% YoY).
• Sluggishness to span another couple of quarters: In the near term, we expect continued moderate growth led by active pruning of long-tail accounts, project delays and pressures emerging out of the Oracle ATG ecosystem. On the other hand, impending wage hike, continued investments in S&M and capability building, and restructuring in the MVS business will keep profitability expansion in check.