ZENT’s Q4FY17 revenue declined 4.9% q-o-q (estimate of +2.7%) to $112 million. The decline was led by the absence of product revenue (~$8m), which sees a bump-up in Q3, and delays in ramp-ups leading to some right-shifting of revenue. While this resulted in a 26% decline in IM revenue (19% of total), the applications business was stable (+1.7% q-o-q).
Due to a weak Q4 and ongoing reconstitution of the business, FY17 revenue grew by 3.5% y-o-y CC. The ebitda margin contracted 450bp q-o-q to 9.3%, led by restructuring in the multi-vendor services (MVS) business (~$3m), pricing decline in some large customers ($1.6m)and a one-time expense of $2m related to property taxes and provisioning for government projects. Even after excluding one-offs, margins shrunk 270bp q-o-q to 11.1%. PAT at `Rs 21.7 crore declined 73.3% q-o-q.
Several phases of ZENT’s restructuring have been under execution, taking a toll on FY17 results, with revenue growth of 3.5% y-o-y CC and margin contraction of 160bp. While headline numbers look dismal, the underlying signs of strategy execution remain encouraging.
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Factoring a slower trajectory of turnaround in business, we have cut revenues by 6.2%/6.7% and ebitda margins by 145bp/116bp, driving EPS correction of 17%/15% for FY18E/19E. For revenue/earnings CAGR of 10/19% over FY17-19E, we maintain Buy with a revised price target of `Rs 1,020—discounting FY19E EPS by 13x. ZENT’s Q4FY17 revenue declined by 4.9% q-o-q, against our expectation of 2.7% q-o-q growth.
The disappointment was led by the infrastructure management business, which declined by 26% q-o-q. The revenue miss here stemmed out of the absence of $8m of product revenue, which was seen in Q3FY17 (strongest quarter for product revenue). Moreover, there was a delay in ramp-up of deals which resulted in the revenue deficit for the quarter. This is, however, gradually expected to pan out over the next two quarters.
The quarter also included one month of revenue from the acquisition of Foolproof, which added ~$1m. In rupee terms, revenue was `Rs 749.2 crore, down 5.4% q-o-q, v/s our estimate of `803.7 crore (1.5% q-o-q). Gross margin declined 200bp q-o-q to 28% (estimate of 30%). Ebitda margin was down 450bp q-o-q to 9.3% (estimate of 14.6%; miss of 530bp).