MOSL: ZENSAR TECHNOLOGIES (Buy)-Exhibiting strategy proof points

Zensar Technologies: Exhibiting strategy proof points

(ZENT IN, Mkt Cap USD0.8b, CMP INR1241, TP INR1500, 21% Upside, Buy)

• Encouraging traction: ZENT's 6.6% QoQ growth to USD135m (+2.2% QoQ) was above our estimate of USD129m because of the acquisition of Cynosure, which we were expecting to be integrated in 2Q. Organic growth on 3% CC was inline. EBITDA margin expanded 100bp QoQ to 12.9%, missing our estimate by 100bp, which was due to provisioning for a bankrupt client. PAT of INR821m was marginally below our estimate of INR836m because of lower-than-estimated operating income.
• Digital game going strong: With four acquisitions over the last two years and investments in a series of capabilities, ZENT's Digital revenue now stands at 43% of total. Total Digital Services (across Applications and Infrastructure) grew by 13.8% QoQ CC, driving much of the improvement in performance. ZENT's revenue grew 18% YoY, of which 14pp was organic - a steep increase from the flat revenue it was clocking in 1QFY18.
• Growth in margins should follow: Initiatives around new capabilities, digital acquisitions, US sales, client mining and a focus on large deals have started to bear fruit and are reflected in the strong revenue turnaround. However, profitability expansion has not kept speed. We reckon that this would be a function of continued growth, fructification of investments and a reduction of low-margin businesses (MVS and RoW).