IGI Logo

* ZENT reported muted growth of 0.4% QoQ in constant currency (CC), beating our estimate of a 0.8% QoQ decline in CC. Deal TCV rose 5.6% YoY to USD175m (seasonal high), with a book-to-bill ratio of 1.2x. ZENT achieved mid-teens EBITDA margin two quarters ahead of its target (14.5%), up 320bp QoQ, led by sharp improvement in both utilization and subcontractor costs.

* While Q4 revenue growth was a little ahead of our expectation, underlying growth (adjusted for one-off revenue recognition delay in Insurance in Q3 and furlough reversals in Q4) improvement remains a work in progress. Given the challenging near-term macro outlook, especially in key verticals like Hi-Tech, Manufacturing and Consumer (56% of Q4 revenues), FY24 topline growth will remain muted (est. 3.4% YoY CC). It will pick up in FY25, as the expanded service portfolio starts delivering on growth. Despite the high share of renewal in Q4, FY23 deal TCV at USD572m (1.0x Book to Bill, flat YoY) should help buffer the incremental impact from weaker macro. We factor in a USD revenue CAGR of 8.0% over FY23-25E.

* On the margin front, the company reported another quarter of exceptional performance in 4QFY23. The execution remains strong with multiple margin levers on utilization, pyramid rationalization and subcon. With a significant beat in Q4, a moderation in attrition (-300bp) and better utilization, we expect the margin to stabilize around the current level and should support FY24 earnings growth. We increase our FY24/FY25 EBITDA margin estimates to 14.6%/15.1% from 13.3%/13.7%, resulting in an INR EPS CAGR of 30% over FY23-25E (partially due to low FY23 base).

* The stock’s relatively low valuation (at 14x FY25E P/E) is attributed to the company’s weak revenue performance over the last two years. We continue to view the significant discount to its peers as excessive and more near-term focused. We expect the discount to narrow as growth recovers in FY24 and FY25. A good cash buffer of USD202m (22% of MCap) also provides a buffer for valuation. Our TP of INR390 implies 16x FY25E EPS. Maintain BUY.

Muted revenue growth, sharp improvement in margins

* Revenue declined 0.3% YoY in CC terms. EBIT was up 21.2% YoY, while PAT fell 8.2% YoY.

* In FY23, revenue in USD terms grew 6.1% YoY, while EBIT/PAT in INR terms declined 22.2%/27.5%.

* Revenue grew 0.4% QoQ in CC terms to USD147.5m (v/s our estimate of 0.8% QoQ CC decline).

* Deal TCV was strong at USD175m (+34% QoQ/+5.6% YoY) due to seasonality. The book-to-bill stood at 1.2x in Q4. Top 10 clients recovered 4.3% QoQ, led by a recovery from extended furloughs in Q3.

* EBITDA margin at 14.5% (+320bp QoQ) beat our estimate by 210bp, fueled by higher gross margin (+460bp QoQ).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer