Maintain BUY on Zensar Technologies - Changing the orbit - HDFC Securities

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

We maintain BUY on Zensar, following a better-than-expected performance and revival in the organic growth engine. Zensar delivered growth of 4.8% QoQ CC, the best organic growth in the past six years, supported by a recovery in the hi- tech vertical (+13% QoQ CC) and strong BFS performance (+2.3% QoQ CC). The demand environment remains robust and Zensar - under the new leadership and revamped sales engine - is all set to accelerate organic growth. The inorganic route will be used to build capabilities in areas of advanced engineering and SaaS. The M3bi acquisition is a step towards enhancing data engineering, BI/analytics capabilities. The TCV wins stood at USD 96.7mn (book to bill at 0.8x), which include 50% net-new wins. The deal trajectory is expected to improve with increased investments in sales and marketing and a greater focus on winning large deals. The management has maintained its guidance to deliver a high-teen EBITDA margin (~18-19%). We increase our EPS estimates by 8.5/9% for FY22/23E to factor in growth revival and M3bi acquisition (~4.3% inorganic growth in FY22E). Our TP of INR 500 is based on 22x FY23E EPS (20x earlier). The stock is trading at a P/E of 22/18.6x FY22/23E EPS, a discount of ~30% to tier-2 IT.

Q1FY22 highlights: (1) Zensar's revenue came in at USD 127.2mn, +5.8/+1.6% QoQ/YoY, higher than our estimate of USD 124.3mn; (2) growth in Q1 was led by hi-Tech/banking verticals, registering a growth of +13/+2.3% QoQ CC, while manufacturing/insurance/consumer declined -4.4/-3.8/-0.1% QoQ CC; (3) among the geographies, growth was led by the US (+6.7% QoQ) and Africa (+9.8% QoQ), while Europe remained flat sequentially; (4) EBITDA margin contracted -146bps QoQ to 18.4% (vs. our expectation of 18.8%), impacted by higher SG&A expenses (-140bps), lower utilisation (-10bps) and higher cost of delivery (-80bps), partially offset by currency (+90bps); (5) wage hike will be effective July-21 and will have an impact of ~100-150bps on the margin in Q2FY22E.

Outlook: We expect USD revenue growth of +12.5/13.1% and EBIT margin of 13.6/14.0% for FY22/23E, resulting in a revenue/EPS CAGR of +12.4/+19.6% over FY21-24E.

Shares of ZENSAR TECHNOLOGIES LTD. was last trading in BSE at Rs. 405.85 as compared to the previous close of Rs. 401.3. The total number of shares traded during the day was 166243 in over 4047 trades.

The stock hit an intraday high of Rs. 413.55 and intraday low of 387.65. The net turnover during the day was Rs. 67044318.

Source : Equity Bulls

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