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MOSL: ZENSAR TECHNOLOGIES (Buy)-Revenue turnaround near completion, margins could follow

Zensar Technologies: Revenue turnaround near completion, margins could follow

(ZENT IN, Mkt Cap USD0.8b, CMP INR246, TP INR285, 16% Upside, Buy)

 

• Strong exit to FY19 augurs well going forward: ZENT's FY19 revenue grew 17.6% YoY to USD567m, EBITDA increased 30% YoY to INR4,766m (margin of 12%) and PAT rose 31.8% YoY to INR 3,137m. Organic revenue growth was ~9% in USD terms and in double-digit on factoring in the RoW discontinuation and the impact from cross currencies. ZENT announced a total dividend of INR2.8/share for FY19, which implies a payout ratio of 20%. 4QFY19 revenue increased 19% YoY (above our estimate of +15% YoY) to USD150m, with 50% of incremental revenue coming from strong QoQ growth in the acquired entities. EBITDA margin expanded 160bp QoQ (our estimate: + 70bp) to 12.5%, supported by some write-back of earlier-period provisions. PAT grew 14% YoY (our estimate: -2%) to INR829m - the outperformance here was driven by higher operational income and other income (INR279m v/s our estimate of INR156m).
• Deal traction should help sustain revenue momentum: ZENT won deals with a total contract value of USD750m in FY19, on the base of ~USD400m in the previous fiscal. The deal pipeline remains strong, unaffected in ZENT's targeted industries/clients by any ongoing macro uncertainty. While growth in FY19 (organically) was driven by Hi-tech and Insurance verticals, Manufacturing should add to it in FY20. This collectively drives our confidence of sustained revenue momentum. Retail should take another couple of quarters before returning to sustained growth.