Result Update: Zensar Technologies Ltd - ACCUMULATE - TP Rs.257 - Kotak

Zensar's 2Q revenue grew by 2.3% QoQ in USD terms to USD 138mn (de growth of 0.7% sequentially without Indigo Slate), marginally below our estimate of USD 139mn. The lower growth can be attributed to lower than expected organic growth. EBITDA margins shrank by ~70bps QoQ to 12.9% primarily because of wage hikes and lower utilization which was offset by lower SG&A expenses.

Key Highlights

- Digital which has been the key focus area for the company showed a slow down in growth rate of 4.1% v/s 6.6% in previous quarter. The slow down in growth rate within the digital was primarily due to lower growth of Digital Services (7% v/s 13.5% in previous quarter) whereas Core Application Services growth remained similar to previous quarter. Growth within Cloud and Infrastructure Services too slowed down to 4.2% v/s 13% in previous quarter. Digital now contributes 44% of the overall revenue.

- Company booked deals in north of USD 600mn in last 12 months of which several USD 20mn+ deals were booked. Cloud Infra alone has won total deals worth USD 45mn+ in previous few months. Digital deal sizes are increasing and the overall deal pipeline remains healthy for the company at USD 800mn+ TCV. Booking stood at USD 290mn+ during first half including more than USD120mn in 2QFY19. Company is working with advisors and has a differentiated strategy of platform plus services which is helping in gaining traction and company being invited for more RFPs.

- Zensar has been aggressively consolidating its non core verticals and service lines. Company now focus on strategic accounts which have a capability to scale up digital. Digital deal sizes are small currently, new deal wins are from area of digital which indicates good progress towards adoption of digital.

- Zensar acquired four companies in the last two years. Keystone, Fullproof, Cynosure are fully integrated and the latest Indigo Slate is expected to be integrated by next quarter. New and existing engagements are both contributing to the revenue growth. The acquisitions have also been an integral part of new deal wins.

Valuation & Outlook

- At current price of Rs.236, stock is trading at 15.3x/12.9x P/E on FY19/FY20 estimates. We maintain our estimates for FY19-20E and will wait for Retail vertical to stabilize as we believe digital plays a pivotal role more so in retail vertical than any other vertical and as digital remains a key focus area for the company. We maintain ACCUMULATE with a revised target price of Rs.257 (Rs.274 earlier).

Shares of ZENSAR TECHNOLOGIES LTD. was last trading in BSE at Rs.226.25 as compared to the previous close of Rs. 222.6. The total number of shares traded during the day was 14024 in over 748 trades.

The stock hit an intraday high of Rs. 234 and intraday low of 220. The net turnover during the day was Rs. 3195223.

Source : Equity Bulls

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