Mid-tier IT services firm Zensar on Tuesday entered into an agreement with Lorhan IT Services, a wholly owned subsidiary of First Tek — a US-based IT services and products company — to divest its Australia, Middle-East and India-based businesses.

The deal is valued at ₹16.9 crore, which includes an upfront consideration of about ₹8.45 crore with additional consideration of about ₹8.45 crore contingent upon exchange rate fluctuations, closing conditions and payment milestones as agreed between the parties.

Decline in profit

Third-party maintenance and RoW (rest of the world) business have been the pain-points for Zensar. In the third quarter, the RoW business declined by 39.6 per cent while the third-party maintenance business saw a drop of 11.5 per cent.

The two businesses have been dragging down the company’s profits, which saw a year-on-year decline of 15.9 per cent in dollar terms to $7.7 million and 6.4 per cent in constant currency terms to ₹55.3 crore.

“If you take out the RoW and third-party maintenance businesses, our core business grew by about 20 per cent in the quarter. These two businesses are margin-dilutive and we are looking at all options to divest them,” Sandeep Kishore, Chief Executive Officer and Managing Director, Zensar Technologies, told BusinessLine .

Instead of expanding its geographic reach, Zensar is now chasing larger deals in its stronghold areas. Several of the large wins over the last quarters are currently in transition, impacting the EBITDA in the current quarter. EBIDTA in the third quarter was at 10.9 per cent, a decline of 5.6 per cent on a YoY basis.

“For us, it is important to go out and fight for the large deals. Once we get the volume, we’ll have the opportunity to get the margins up,” Kishore said. “Our top 20 accounts have grown 26 per cent year on year. The strategy is to remain focussed on fewer accounts and develop relationships.”

Kishore expects the company to get back to the 15 per cent EBITDA margin range once the large deals mature and the company is able to divest the non-core businesses, which are eating into its profits.

Zensar had been looking to divest its non-core businesses to focus on core markets in the US, Europe and South Africa for a while now and was looking at all possible options to divest the non-core businesses. The core operations accounted for more than 98 per cent of Zensar’s consolidated revenue as on December 31, 2018.

Growing share of Digitial

On Monday, the company reported a 17.1 per cent YoY revenue growth in dollar terms to $143.7 million. In constant currency terms, the growth was 17.6 per cent at ₹1,035.5 crore. Digital services continue to grow and have moved up 35.9 per cent on a yearly basis. Digital now contributes 44.9 per cent of Q3FY19 revenue.

On the First Tek deal, Equirus represented Zensar and acted as the sole advisor. Under the terms of the transaction, identified assets, liabilities, employees, and client contracts relevant to these businesses will be transferred to Lorhan. The Australia and the Middle East businesses will be transferred by way of a share sale, while the India-based business will be transferred as a slump sale.

“Zensar is focussed on strengthening its key verticals such as hi-tech manufacturing, retail, and insurance in our core markets of the US, Europe and South Africa. In First Tek group, we found the right partner for our Australia, the Middle-East and India businesses. Given their focus to grow these regions, we believe these businesses are aligned better for growth with FirstTek,” Kishore added.

Zensar is betting on large digital deals to compete against the IT services companies. It has acquired four companies in last two years to expand its digital footprint and to create inroads into some of the areas where it was not present.

“We will continue to acquire companies to both fill capability gaps as well as to get scale,” Kishore said.