Maintain ADD on Zensar Technologies - Elusive quest for growth - HDFC Securities

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.

Zensar Technologies (Q4FY20 Results Review) : Elusive quest for growth.

Zensar registered strong margin recovery (+705bps QoQ) but revenue decline was higher than estimate. The deal pipeline continues to be robust (USD 1bn) but TCV has slowed down (-25% YoY) due to Covid-19 related uncertainty. Digital is the key revenue driver but Legacy drag (-9.7% in FY20) is weighing on growth. Delay in decision making, pricing pressure, cut in discretionary spending and high exposure to Hi-Tech, Manufacturing and Retail will pose growth challenges in FY21E. We cut our FY21/22E rev est. by 5.7/5.8% to factor uncertainty. Increase FY21/22E EPS est. by +2.2/+3.9% due to margin reset. Our TP of Rs 98 is based on 8x (~30% discount to 5Y avg.) FY22E EPS. Maintain ADD.

Revenue under pressure: Revenue stood at USD 140.6mn -1.5/-4.2% QoQ/YoY CC lower than exp of USD 142mn led by sharp fall in Legacy (-8.5% QoQ). Decline was led by Covid impact (-450bps), Stress in non-core portfolio offset by reversal of one-time discounts. Growth in 1HFY21E will be impacted due to deferrals of projects and cut in discretionary spending. We assume -6.9/-3.9% fall in rev for 1Q/2Q FY21E with mild recovery in 2H.

Margins improvement: Strong expansion in EBIT margin (9.8% vs 2.8% QoQ) was a positive surprise, but it's down 89bps on YoY basis. The expansion was led by one-time reversals, operating efficiency and better mix. Stringent cost control measures, delay of salary hike, decline in sub-con, hiring freeze and vendor negotiations will support margin in FY21E.

Vertical outlook: Hi-Tech / Manufacturing / Insurance registered decline of 0.7/11.1/3.9 QoQ CC. Retail recovered in the quarter but will remain under stress. Hi-Tech/Manufacturing/Insurance will have challenges. BFS (+6.1% QoQ CC) growth will continue supported by deal wins.

BS highlights: Cash generation improved significantly led by lower DSO days (87 vs 102 days). OCF/EBITDA now stands at healthy 121.5% (3Y average of ~70%). Net Cash stands at Rs 5.75bn which is ~30% of MCap.

Valuation and view. Zensar's organic growth has slipped (+5.8% in FY20 vs. ~9% in FY19) due to high exposure to stressed verticals like Hi-Tech, Manufacturing and Retail. Deal pipeline is healthy at USD 1bn, ~50% of the pipeline are large deals (TCV >USD 10mn), but conversion and growth will remain a challenge in FY21E (-12% YoY). Margin expansion is also difficult considering growth concerns and higher onsite mix. The stock has underperformed in the last 6M (-54%) and currently traded at a P/E of 9.3/7.1x FY21/22E EPS which is at a steep discount to historical average.

Shares of ZENSAR TECHNOLOGIES LTD. was last trading in BSE at Rs.87.3 as compared to the previous close of Rs. 83.15. The total number of shares traded during the day was 52019 in over 323 trades.

The stock hit an intraday high of Rs. 87.3 and intraday low of 85.05. The net turnover during the day was Rs. 4538511.

Source : Equity Bulls

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