Revenue beat despite continued consolidation signifies on-track recovery and sustained traction
Revenue growth exceeds estimates…:
Zensar Technologies’ (ZENT) 1QFY17 revenue growth of 2.6% QoQ exceeded our estimate of +1.5% QoQ. Growth was largely led by ramp-up in new deals and continued strength in Digital, which now accounts for 27.3% of total revenue. Apart from Commerce, ZENT strengthened its presence in Digital by launching a suite of products to tap the CMO budget.
despite continued restructuring:
Growth was strong, despite consolidation of low-yield and non-scalable accounts (from 211 to 183 in two quarters) as well as further decline in the Product business (now ~4% of total revenue). Top 6-10 accounts grew by 17.3% QoQ and top 11-20 by 4.7% QoQ, reflecting the fruition of account mining. Momentum in large deal wins strengthened considerably, with a pipeline of USD200m+ in 1QFY17, compared to USD75m two quarters ago.
Margin expansion capped by onsite-centricity:
Margins expanded only 150bp QoQ to 13.8% (v/s expectation of 350bp), despite the 200bp tailwind from the previous quarter’s one-off provisioning. Higher onsite growth and lower utilization capped the quantum of expansion. However, this situation is likely to improve and hence partly offset wage hike pressure in 2Q.
Continued strategy execution key to re-rating:
We expect 5% revenue growth in FY17 due to consolidation of non-core areas. However, strength in focus areas and execution progress lend confidence of 12% growth in FY18. Despite re-investments, we believe portfolio reconstitution and revenue growth revival should lead to margin expansion of 210bp over the next two years. Given the improved positioning of ZENT, the pace at which it is revamping its business and consequent improvement in financials, we see potential for growth acceleration and re-rating. We thus maintain our Buy rating with a one-year price target of INR1,300, discounting forward EPS by 13x.
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