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MOSL: ZENSAR TECHNOLOGIES (Buy)-Revenue from large deals weighs on profitability

Zensar Technologies: Revenue from large deals weighs on profitability

(ZENT IN, Mkt Cap USD0.7b, CMP INR220, TP INR260, 18% Upside, Buy)

 

• Large deals take a toll on profitability: Revenue grew 17% YoY (our estimate: +16% YoY) to USD143.7m, EBITDA increased 5% YoY (our estimate: +30% YoY) to INR1,104m, while PAT declined 2% YoY to INR565m (1.5% miss). CC revenue growth of 4.5% QoQ (+17.6% YoY) was above our estimate of 3.2%. Excluding revenues from the full-quarter integration of IndigoSlate, revenue growth stood at 2.3%, implying that the beat to our estimate came from 59% QoQ growth in the acquired entity. For 9MFY19, USD revenue/EBITDA/PAT grew 17%/30%/39.5% YoY.
• A confluence of factors weighed on margins: EBITDA margin shrank by 210bp QoQ to 10.6%, well below our estimate of 13.3%. Management attributed this to (i) transition costs in large deals (~120bp), (ii) furloughs (~50bp), (iii) margins contraction in non-core business (~40bp) and (iv) lower utilization (~50bp), partly offset by gain from INR depreciation. While management expects margins in the core business to revert to 15%, we are conservative in our estimates and expect overall EBITDA margin of 12.5%/13.1% in FY20/21. This is mainly owing to the nature of costs that dragged margins during the quarter – purchase of traded goods and a rise in sub-contractor costs.
• Deal traction lends revenue visibility: ZENT signed USD200m+ TCV of deals during the quarter, taking YTD deal wins to USD500m+. This lends visibility on revenue growth going forward, over and above the strong traction in the Digital segment.