COVID drags Zensar Tech’s revenue, boosts Q1 profit

Zensar Tech, a mid-size IT and outsourcing company based in India, reported a 3.1% dip in its revenue (after adjusting for currency fluctuations) as the number of onshore employees fell sharply year-on-year due to COVID-19.

Constant currency calculations measure how the company’s revenue would have performed had there been no change in currency exchange rates this year. In other words, it gives an ‘untranslated’ or native look at revenue by stripping away currency translation gains and losses.

However, in actual fact, the currencies did move, with both the Indian rupee and the US dollar falling against prominent currencies during the one year gap. The dollar, in fact, fell quite sharply against several global currencies over the last one year.

As a result, when Zensar’s entire revenue was translated into the US currency, the company generated more this year compared to the same Apr-Jun period of last year. In USD terms, Zensar Technologies’ revenue rose 1.6% on year to $127.2 mln, instead of falling.

The Indian rupee too fell against major global currencies during the period, but not as much as the US dollar did. As a result, when the company’s revenue is translated into rupees, the resulting rupee figure was not higher than last year’s. However, because the rupee did depreciate, the fall was less than the 3.1% number implied by constant currency calculations.

In rupee terms, Zensar Tech’s Q1 revenue fell 1.2% on year to Rs 936.8 cr, instead of 3.1% seen in constant currency or untranslated terms.

COVID IMPACT

However, judging the company’s performance purely on the basis of its top-line, or revenue, performance would be less than optimal, given that the COVID-19 pandemic has changed the way IT companies are conducting their business. While the overall size may have shrunk, the business has become more profitable due to lower costs.

While earlier, a large number of employees would be sent to client locations (onsite) to help out with various projects, with COVID, this number has fallen sharply in COVID times.

This has dampened the company’s top line numbers, as onsite employees typically generate about five times the revenue (billing) as offshore (or India-based) employees.

In terms of raw numbers, onsite employees shrunk by a whopping 13% to 1,870 during this quarter compared to 2,151 such employees during the same period last year.

Against this reduction of 281 onsite employees over the last one year, the number of offshore employees increased by 735. However, this was clearly not enough to offset the impact on revenue.

The impact can clearly be seen in terms of billing.

Onsite work used to contribute 63.4% of the company’s total revenue in Apr-Jun of last year. However, this year, the contribution of onsite work fell by more than 5 percentage points. That translates to a decline of 8-9% in the absolute revenue the company was generating from onsite work over the last one year.

In fact, the contribution of onsite services to the company’s total revenue has been declining steadily over the last one year. During the immediate preceding quarter of Jan-Mar 2021, onsite work had contributed 59.4% of the total revenue, a full 1.1 percentage point higher than the latest quarter.

In line with industry trends, there was an increase in attrition — the number of people who are leaving the company for another. 12-month voluntary attrition levels increased sharply to 18.1% during the Apr-Jun quarter from 14.8% in the preceding quarter, indicating a sharp pick-up in attrition during the latest period.

MARGINS UP

While the shift from onshore to offshore may be bad for optics due to the hit to the revenue, it actually benefited the company’s earnings and margins by helping lower costs.

This can be seen in terms of the hit to the revenue and the impact on expenses. The company’s revenue for Apr-Jun this year fell by 54 cr from last year to 955.2 cr. However, total expenses, which includes both cash items such as travel and salaries as well as non-cash items such as wear tear accounting, was down by a whopping 92.1 cr at Rs 816 cr.

This sharp decline in costs had a salubrious effect on the company’s profit margins. The company’s gross profit jumped to 326 cr during Q1 this year from 281 cr during the same three months of last year.

Operating or cash profit (EBITDA) jumped to 172.5 cr this quarter from Rs 141.8 cr during the same period of last year. This is despite spending around Rs 10 cr more on sales and marketing this year.

Net profit too rose to Rs 101 cr from Rs 72.7 cr last year.

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