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MOSL: ZENSAR TECHNOLOGIES (Buy)- Revenue growth takes a pause

ZENSAR TECHNOLOGIES: Revenue growth takes a pause

(ZENT IN, Mkt Cap USD0.6b, CMP INR199, TP INR280, 41% Upside, Buy)

 

• Soft topline, steady margins: 2QFY20 revenue increased 12.8% YoY (v/s est. of 14.8%) to USD152m. EBIT increased 6.2% YoY to INR1,115m (margin of 10.4%) v/s our expectation of 5.2% decline YoY. Despite higher operational income, PAT declined 16% YoY to INR799m (v/s est. of INR843m) led by higher interest expense at INR139m (v/s est. of INR39m) and lower other income at INR9m (v/s est. of INR74m).
• Deal completion drags revenue growth: ZENT reported 15.8% QoQ drop in the CIS business, 7.7% drop in Retail vertical and 3.3% drop in revenues from the US. All of this was a result of the completion of a large transformation-based project by one of its top-10 customers operating in the public sector. ZENT remains confident of winning additional projects from the customer; however, near-term revenue from the same can suffer due to some delays in decision making. Deals won during the quarter stood at USD120, lower than the booked revenue and six quarter TCV average.
• Retail outlook muted: While the Retail revenue hit can be attributed to the completion of a large deal, the outlook appears gloomy as well. Sector specific issues are causing spending delays/cuts from big box retailers leading to near/medium-term volatility. ZENT has identified growth segments within the vertical; however, its focus on small/niche retailers and technology retail is not enough to offset the macro impact for the segment. Retail should take at least a couple of quarters before returning to sustained growth.