Looking at strategic acquisitions in digital biz: Zensar

In an interview to CNBC-TV18, Ganesh Natrajan of Zensar shares his views on the company’s Q4 numbers.

Below is the verbatim transcript of Ganesh Natarajan’s interview with Reema Tendulkar and Sumaira Abidi on CNBC-TV18.Sumaira: Q4 was a tough quarter, you saw a hit from the currency front plus you had to give a discount to one of your clients. So, can you tell us how Q1 has shaped up so far?A: So far it has been very good because we have closed some fairly significant deals. Our focus on digital transformation has paid off. So, it is looking very good at this point of time.Reema: Can you walk us through the total quantum of deals that you have closed so far in the first two months of this fiscal year, what is the deal pipeline looking like?A: We have a very substantial pipeline. It is over USD 400 million. In fact the pipeline is actually going up. We have closed quite a few deals. They are all in the USD 1-5 million space. There is one which is larger and the good news is that, it has come across Europe, Africa and US. We are also chasing some fairly significant deals. So, overall, across all our verticals which is manufacturing, retail and insurance, it is looking good, so, we have no qualms for this quarter or for this year.Sumaira: In FY15 your company had a constant currency growth of about 13 percent odd. Do you see FY16 fairing better?A: It is going to be very good. At this point of time I can only guide towards double digit. However, given the pipeline and the orders we are booking, it looks to be a very good year. Reema: Since you have been talking about how the company has closed various deals, can you walk us through what the current run rate of deals closed are per quarter and has it improved compared to what it was one year back?A: If you look at it on a quarterly basis, we are closing between USD 5-10 million kind of deals and that looks to be the trend as well because there is a good pipeline. What is important to be pointed here is that it is across all our horizontal areas – infrastructure management, the whole area of cloud, social media as well as the traditional enterprise space. Across all the geographies, verticals and horizontals things are looking good.Sumaira: I do understand that your focus is on digital transformation. IT currently contributes about 12.6 percent to your revenues so what are the margins that you enjoy in the digital space as well as the size of deals wins there?A: Deal sizes depends on what kind of deal it is. If it is an ecommerce deal, it is between USD 1-3 million as a project. If it is just a smaller social listening or mobility deal then it could be smaller, maybe USD 200,000-300,000.However, the good news is, if you look at even the fourth quarter of last year, the profitability from digital and ecommerce has been higher than our traditional business. The pipeline is good. If you look at the Oracle Partnership that we enjoy for ATG and Endeca which are high-end ecommerce services, I think that is looking good.So, going forward if you continue to focus on the right areas including cloud transitions, as well as ecommerce, you will continue to see not only good revenue growth but very good profit growth.Reema: In the overall deal pipeline of USD 400 million what percentage of it is linked to the digital pipeline?A: Digital would be in the region of USD 40-50 million as a current pipeline which is a trend because digital tends to be projects that come up and close pretty fast. So, when you look at long lead time deals, that is typically in the infrastructure and then the applications testing space. However, the ERP business, SAP, Oracle and digital, tend to be shorter pipelines and requires shorter lead times to close. Sumaira: You indicated that digital profitability is higher, so can you tell us what are the margins that you enjoy in this space?A: It varies, in fact we have had e-commerce deals in the retail-digital space which has been as high as 20-21 percent, But then it gets compensated because you do a small project in mobility, that will be 12-13 percent. However, one to two percentage points above the norm is really what our margin is and our profile additional is. My belief is as we mature and we get some kind of a leadership position in retail, it will probably go higher.Reema: The recent trend is many Indian IT companies are acquiring digital companies. You have net cash of Rs 121 crore. Is the company looking at an acquisition?A: The answer is yes, because we are looking not at large acquisitions but more of strategic investments in companies which are doing well in digital. So, if a good opportunity comes across, we have both the cash and the intention to do it. What we are not interested in, unlike some of our peers, is to do minority investments. I do not think we are an incubator or an angel investing firm. So, we will do deals where we have a controlling interest. Of course, we will leave the company to grow, work with our ecosystem and make them more successful.Suimaira: Could you tell us if you have narrowed down on any potential targets that you could be looking to acquire?A: There are discussions going on as we speak, but digital is a tough space because the companies that are there are very hot, they do expect a much larger revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) multiples than we would normally do. So, there are discussions in play but I would certainly expect that over the next six to nine months, we will be able to do one or two of these investments.

We have a team which is focused on doing that and I am fairly confident that given our own credibility in the digital and e-commerce space, we will find it easier to get other companies to work along with us and make an investment in that. Sumaira: FY15 margins were at 14 and half, 15 percent. Is there scope to improve here?A: During this year, we will integrate professional access with our larger retail business. It is difficult to have a specific target but definitely if you look at the retail business led by the whole e-commerce-professional access space, we are looking at 18-20 percent growth in revenues. We are certainly looking at improvement in profit margins.

So, my own feeling is that given the end-to-end capability which we have in retail, that could well be the star vertical for us this year and maybe in the next couple of years as well. So far it has been manufacturing but retail and insurance have been number two. However, retail will take the lead because of the obvious traction we have in this space.