EUR 120.00 For Business Accounts Only

MOSL: ZENSAR TECHNOLOGIES (Buy)-Traction in CIS-deal pipeline remains healthy

ZENSAR TECHNOLOGIES: Traction in CIS; deal pipeline remains healthy

(ZENT IN, Mkt Cap USD0.7b, CMP INR217, TP INR286, 32% Upside, Buy)

 

• Operating performance above expectations: ZENT's 1QFY20 revenue grew 16.4% YoY (estimate: +12.2% YoY) to USD153m, while EBIT increased 6% YoY (our estimate: +2% YoY) to INR1,136m (margin of 10.7%). Despite higher operational income, PAT declined 5.8% YoY to INR787m (our estimate: INR833m) due to higher interest expense (INR166m v/s our estimate of INR45m) and lower other income (INR38m v/s our estimate of INR74m). Increase in revenue was a function of a large deal ramp-up in CIS (17.2% of revenues), which contributed 85% of incremental revenue during the quarter. On a like-to-like basis, the margin was impacted by currency movement, lower utilization and fresher hiring.
• Deal traction to help sustain revenue momentum: ZENT won deals with a total contract value of USD160m in 1QFY20. This takes total LTM bookings to ~USD700m. The deal pipeline remains strong (upwards of USD 1b), unaffected in ZENT's targeted industries/clients by any ongoing macro uncertainty. Overall deal size is shrinking across the industry, which bodes well for ZENT. This collectively drives our confidence of sustained revenue momentum. Retail should take another couple of quarters before returning to sustained growth.
• Multi-pronged levers to margin expansion: ZENT's margin in the core business is 14.7% (~93% of revenues) compared to the overall margin of 12.8% (adjusting for Ind-AS). It expects the take the core margin to 15%, with levers of: [1] margin-accretive cloud infrastructure deals, [2] operational efficiencies from utilization and a reduction in sub-contractor expenses, [3] realization improvement in Digital and [4] large deals moving to steady state. Also, the non-core business should gradually wind down to zero, which should support further margin enhancement through a business mix-based improvement.
• Valuation view: ZENT's turnaround efforts have been more protracted with the overhaul in US sales, the addition of inorganic digital capabilities, the discontinuation of the non-core business and the long tail of non-scalable accounts. This is now nearing completion, with the Retail vertical turnaround and the sale of the third-party maintenance business the remnant areas to address. This drives our expectation of 13%/15.4% USD revenue/EPS CAGR over FY19-21. Our price target of INR285 discounts forward earnings by 15x and implies a 31% upside. Maintain Buy.