Zensar's Q4 results point to short-term pain for long-term gain

Sandeep Kishore, Zensar’s chief executive officer and managing director had indicated that things will get worse before they get better
Image: Mexy Xavier

Zensar Technologies, the information technology (IT) arm of the tyres-to-power transmission conglomerate RPG Enterprises posted a disappointing set of earnings for the last quarter of fiscal 2017—a reflection of the headwinds faced by the Indian IT sector in general and the structural shift underway at Zensar in particular.

The IT firm of the Harsh Goenka-led business house is looking to progressively move away from its traditional model of offering undifferentiated enterprise application support services (and offering a cost arbitrage while doing so) to global clients, and towards a new model of becoming a solutions partner for companies looking to digitally transform themselves.

In an interview with Forbes India in February (https://beta.forbesindia.com/article/boardroom/zensar-technologies-on-the-digital-highway/46707/1 ), Sandeep Kishore, Zensar’s chief executive officer and managing director had indicated that things will get worse before they get better. And that’s what happened last quarter.

For the three months ended March 31, Zensar saw its profit after tax decline sharply by 73.3 percent sequentially and 69.1 percent year-on-year to Rs 21.7 crore. The company’s operating revenue in this period of Rs 749.20 crore, was down 5.4 percent sequentially in rupee terms, and was marginally higher  (0.4 percent) than the year-ago period.

Zensar’s Ebitda (earnings before interest, tax, depreciation and amortisation) stood at Rs 70.1 crore, down 36.4 percent quarter-on-quarter and almost 28 percent over the year earlier; while Ebitda margin for the January-March period stood at 9.4 percent, down from almost 14 percent in the preceding October-December quarter.

For the full financial year, Zensar clocked an operating turnover of Rs 3,080.5 crore, up 4 percent over FY16, an Ebitda of Rs 398 crore (down 9.6 percent) and net profit of Rs 355.3 crore (down 17 percent).
Zensar’s share price fell as much as 8.47 percent on BSE on April 26 to close at Rs 838.35 apiece.

Zensar, which despite being a five-decade-old firm (including around 15 years in its current listed avatar) has failed to emerge out of the mid-tier ranks, was faced with the same headwinds that have impacted some of its larger peers in the sector, like Tata Consultancy Services (TCS) and Infosys—a sharp appreciation of the Indian Rupee against the US Dollar and tapering growth in the legacy IT business.

Media reports that emerged on Wednesday post Zensar’s results quoted Kishore as stating that as much as 60 percent of the decline in his company’s profitability was on account of foreign exchange movement. In the quarter under review, the rupee has appreciated as much as 5 percent vis-à-vis the dollar, taking a toll on the profit and loss accounts of Indian IT companies. Kishore also stated that the company, which counts marquee private equity firm Apax Partners as one of its investors, has made some provisions on account of the contracts it had closed.

Kishore had told Forbes India that Zensar had shut down some 50 run-of-the-mill projects that it was working on earlier, since there was no potential of future growth from those accounts. According to Zensar’s latest investor presentation, the decline in operating margins and revenue are also a function of delays in the commencement of some new projects in the US, as well as increasing proportion of onsite revenues. There was also a “conscious decline of non-core areas of MVS (multi-vendor support) and IM (infrastructure management) projects, the presentation noted.

The good news for Zensar is that its digital business—comprising services such as robotic process automation, big data and analytics, artificial intelligence and cloud computing—are up and running. These new-age digital businesses account for 34 percent of Zensar’s overall turnover in FY17, up from 30 percent at the end of September 2016.

Two of the company’s strategic acquisitions also occurred during the second half of the current fiscal. While the acquisition of Foolproof, a UK-based digital design consultancy, was done in November 2016; in March, Zensar said that it was acquiring an omni-channel retail solutions firm Keystone Logic. Consequently, earnings from these two firms (and any more that Zensar decides to buy in 2017-18) will reflect in the company’s consolidated financials for fiscal 2018 and help mitigate some of the challenges faced by the legacy business.

But certain red herrings, such as the issue of visa restrictions for Indian IT workers in the US, will remain and impact Indian technology firms. Companies such as Zensar and TCS have indicated that they would look to hire more locally in the US for their onsite operations, and this is bound to have an impact on their wage bills.

The key for Zensar going forward would be to adjust the pace of watering down its legacy business vis-à-vis the pace of ramping up its digital business such that an optimum balance is achieved.