IGI Logo

Strong margin uptick; growth outlook remains weak

Limited room for margin upside hereon; maintain Neutral 

* ZENT reported 2QFY24 revenue growth at 0.2% QoQ in constant currency (CC), in line with our estimate. Deal TCV was up 37% YoY at USD195m on account of the timing of deal closures. ZENT once again surprised on the margin front by absorbing the majority of wage hikes, partly due to the reversal of FY23 management bonuses.

* While revenue growth in 2Q was in line with our estimate, the management remains cautious about the near-term demand environment, citing persistent challenges in Hi-Tech vertical. 3QFY24 is expected to remain weak with slower demand and impact from furloughs. Given the challenging nearterm macro outlook, especially in key verticals like Hi-Tech, Manufacturing and Consumer, we expect FY24 revenue growth to remain muted (est. 0.8% YoY CC). Revenue growth should improve in FY25 as the expanded service portfolio starts delivering on growth. We factor in USD revenue CAGR of 5.6% over FY23-25E.

* On the margin front, ZENT once again surprised as it was largely able to absorb the impact of wage hikes and took a negligible hit on margins despite wage hikes that were higher than the industry. Strong margin improvement was aided by a 160bp gain from the reversal of FY23 management bonuses. The management has maintained its EBITDA margin guidance in mid-teens and plans to reinvest above that level for growth. With strong margin improvements in 1HFY24, we expect ZENT to deliver 17.3% EBITDA margin in FY24 and 16% in FY25. This should result in an INR EPS CAGR of 34% over FY23-25E (partially on low FY23 base).

* The stock has run up meaningfully (2.5x last year) on margin improvement. Given near-term challenges in a significant portion of its portfolio and limited upside on margins, we see current valuations at 21xFY25E EPS fair. Our TP of INR520 implies 20xFY25E EPS. Retain Neutral.

In-line revenue, substantial beat on margins

* Revenue declined 3.4% YoY in CC terms. EBIT grew 2.5x YoY and PAT jumped 2x YoY.

* Revenue grew 0.2% QoQ in CC terms to USD150.2m (in line). Deal TCV was strong at USD195m (+27% QoQ/+37% YoY), with book-to-bill at 1.3x.

* EBITDA margin came in at 18.6% (-20bp QoQ) vs. our estimates of 16.2%, aided by cuts in SG&A (down 11% QoQ). Employee expenses rose only 2% QoQ despite wage hikes.

* Net headcount was down 210 QoQ, LTM attrition was down 300bp QoQ at 13.1%, utilization was up 60bp QoQ at 83.1%, and offshore revenue share was up 110bp QoQ.

* PAT stood at INR 1,738m (+11.2% QoQ), beating our estimate of INR1,268m, led by sustained operating margin.

* Cash and Investments stood at USD227.1m (15% of MCap). 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412