Background: Zensar Technologies is an RPG Group company, with end-to-end services from IT development to business process outsourcing. The company's business is spread across USA, Europe and Africa with around 308 active clients. The company's portfolio focuses on Hi-tech & manufacturing, retail and BFSI sectors. Zensar provides Analytics, Cloud & infrastructure, enterprise applications, digital experience and service line transformation...

Zensar Technologies Ltd (Zensar) reported a sluggish growth in Q4 FY20 due to COVID outbreak. Revenue stood at Rs. 1017.8 crs down 2.8% YoY and 0.3% QoQ. Operating profit showed a growth of 2.6% YoY at Rs. 100 crs

Retail, manufacturing sector to impact near term revenues Zensar expects retail (that contributes ~15% of revenues) to be severely impacted in the near term. In addition, we believe one of the company's top clients will report subdued result in the near term. This could impact the near term financials. Further, the company expects a ramp down in Hi Tech and some impact in insurance to be partially offset by banking. This, coupled with the book to bill ratio of 0.8x in Q4FY20, we expect the company to report declining revenues in the next two quarters and an improvement in...

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. 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.

COVID-19 uncertainty remained a key overhang on We upgrade our EPS estimate for FY21/22E by 9%/15% as (1) we rebase our exchange rate assumptions and adjust our margin trajectory post the beat In 4QFY20, revenue (USD)/EBIT (INR)/PAT decreased 5%/11%/20% YoY (v/s est. Africa grew 7% while EBIT margins posted a robust recovery to 9.8% (~700bp QoQ, higher than our optimization (200bp), (3) Change in service mix ( 80bp). The company does not see any need of goodwill impairment in its acquired Barring FY19 when Zensars overall revenue growth (including inorganic) came close to that of its mid-cap peers (mostly organic), the stock always traded at steep discount to the sector (~8-10x one-year forward P/E). Revenue declined ~1.5% QoQ (CC) due to (1) COVID impact (-4.5 pp), (2) change in revenue mix (-2 pp) and (3) abscence of one-offs which were there in 3QFY20 (+6% QoQ, CC), other verticals reported sequential decline.

The spread of Covid-19 has led to lockdowns in many countries globally and could have adverse economic implications. In addition, the recent fall in crude prices could also have an adverse impact of fiscal health of oil producing countries. As a result, IT companies, which have considerable exposure to verticals such as oil, energy & utilities; banking & capital markets; manufacturing and travel & transport could see an adverse impact from the ongoing crisis. Companies like Wipro, Infosys in large cap and MindTree, NIIT Tech, Sonata software, Cyient, Accelya Solutions among...

Zensar Technologies Ltd. (Zensar) reported weak results in terms of top line and on operating margins front in Q3FY20. Zensar posted revenue de-growth of 6.4% on QoQ basis and 0.8% on YoY basis in constant currency (CC) terms for the period of Q3FY20 at Rs.1,021crs.

Background: Zensar Technologies is an RPG Group company, with end-to-end services from IT development to business process outsourcing. The company's business is spread across USA, Europe and Africa with around 308 active clients. The company's portfolio focuses on Hi-tech & manufacturing, retail and BFSI sectors. Zensar provides Analytics, Cloud & infrastructure, enterprise applications, digital experience and service line transformation...

Deal wins, digital, client mining key growth levers The company reported a sequential decline of 5.9% in dollar revenues in the quarter on the back of 13.4% QoQ drag in core revenues. This was primarily due to client specific ramp down in retail ($5 million) along with seasonal weakness and volume discount given to two clients. On the other hand, digital increased 1.6% QoQ and 20.2% YoY. Further, strong order booking of $170 million+ TCV with 45% as new wins and healthy pipeline coupled with consistent focus on client mining would lead revenues to grow at a...

Zensar's organic growth has slipped (~5% in FY20E vs. ~9% in FY19) due to high exposure to stressed verticals like Hi-Tech, Manufacturing and Retail. BSFI is doing well led by deals wins in Insurance and focus on large African banks. Retail performace has been disappointing and is taking longer than expected to recover. Deal pipeline is healthy at USD 1bn, ~50% of the pipeline are large deals (TCV >USD 5mn) but conversion and execution remains the key. Margin recovery target is aggressive considering the ongoing restructuring and higher onsite revenue mix. We build 7.1/6.1/6.4% Revenue/EBIT/PAT CAGR over FY19-22E. The stock trades at a P/E of 13.5/10.2x FY21/22E, which is reasonable but better growth and margin visibility will lead to re-rating. We downgrade Zensar to NEU (from BUY), post disappointing 3QFY20, growth challenges and weak execution. Deal pipeline is healthy and TCV wins have improved but not reflecting in growth. Margin recovery is slower than expected and Retail/Legacy drag is weighing on growth and margins. We cut FY22E Rev/EPS by 10.5/19.9% and reduce P/E multiple to 11x vs. 12x earlier. Our TP of Rs 177 is based on 11x (~14% discount to 5Y average) Dec-21E EPS.

The sharp decline can be largely attributed to (1) one-time tail account ramp downs in retail, (2) furloughs, and (3) year-end volume discounts. Given the available margin levers and impending headwinds (e.g. wage hikes, etc.), we expect EBITDA margins to remain flat at ~11% in FY21 before Barring FY19 when overall revenue growth (including inorganic) came close to that of mid-cap peers (mostly organic), the stock always traded at a steep discount to the sector (in range of 8-10x one-year forward P/E). This was due to its inferior growth (organic revenue CAGR of 4% over FY15-20E v/s 12%+ for mid-cap peers), pay-out ratio (20% v/s average pay-out of 40%) and return profile (RoE of 18% v/s 30%+ for On our revised estimates, the stock is trading at an optically expensive multiple of ~17x FY21E EPS (depressed earnings though).

Blame it on Retail and delay in renewals: Growth momentum at Zensar slowed down in Q2F20 due to sustained weakness in Retail and delay in deal renewals post completion of a large deal in Cloud Infra Services.

Zensar's key vertical (~53% of rev) Hi-Tech and Manufacturing are exposed to macro uncertainity and can get impacted if trade war risk accelerate. BSFI is doing well led by ramp-up of large deals in Insurance. Retail performace has been disappointing and is taking longer than expected to recover. Overall the growth engine will have near term challenges and will recover with large deal wins. Deal pipeline is healthy at USD 1bn and ~52% of the pipeline are large deals (TCV >USD 5mn). Margin recovery is slow but will recover gradually with growth. We build 11/16/15% Revenue/EBIT/PAT CAGR over FY19-22E. We maintain our positive view based on (1) High exposure to Digital, (2) Robust deal pipeline, (3) Scope for margin expansion and (4) Reasonable valuation. Risks include delay in decision making, trade wars and deterioration of US/Europe macro environment. We maintain BUY on Zensar despite muted performance in 2QFY20. Deal pipeline remains strong but TCV wins have slowed down due to macro uncertainty. Margin recovery is slower than expected and Retail weakness is weighing on growth. We cut FY21E Rev/EPS by 3.7/5.4% and reduce P/E multiple to 12x from 14x. Our TP of Rs 240 is based on 12x Sep-21E EPS.

22 October 2019 2QFY20 revenue increased 12.8% YoY (v/s est. EBIT increased 6.2% YoY to INR1,115m (margin of 10.4%) v/s our expectation of 5.2% decline YoY. Despite higher operational income, PAT declined 16% YoY to INR799m (v/s est. of INR843m) led by higher interest expense at INR139m (v/s est. of INR39m) and lower other income at INR9m (v/s est. ZENT reported 15.8% QoQ drop in the CIS business, 7.7% drop in Retail vertical and 3.

Zensar Technologies Ltd, is a specialized IT Service provider headquartered in Pune, India. We initiate coverage with BUY rating and a target price of Rs. 270 i.e. 23% upside.

Good Set of Numbers: Zensar reported a revenue growth of 18% YoY to Rs. 10661 Mn. In $ terms Zensar reported a revenue of $153.3 Mn up 3% QoQ. Revenues were up 16.4% in Q1FY19.

Zensar's organic growth has improved led by robust deal wins but the margin recovery is lagging. Higher on-site revenue mix, slowdown in Retail, drop in utilisation (fresher's hiring) and investments in the business are impacting margins. We expect gradual recovery in EBIT margins (10.7/11.0% in FY20/21E). Deal pipe-line is healthy at USD 1bn, ~60% of the pipeline is large deals (TCV >USD 10mn). TCV for the quarter stood at USD 160mn (including renewals) and USD 750mn (~50% net new) for FY19. We maintain our positive view based on (1) Focus on POC led Digital sales, (2) Robust deal pipeline and (3) Growth visibility in the core business. We build 12/16/15% Revenue/EBIT/PAT CAGR over FY19-22E. Risks include delay in execution of large deals, onsite wage inflation and deterioration in US/Europe macros. We maintain BUY on Zensar post an in-line 1QFY20. Strong deal pipeline, ramp-up of large deals and improving win-ratio provides revenue visibility. Margins are not showing signs of improvement despite revenue up-tick. We cut multiple to 14x from 16x on slow margin recovery and rising on-site cost. Our TP of Rs 265 is based on 14x June-21E EPS.

View: Healthy deal win to aid revenue growth momentum Zensar's Q1FY20 revenue was lower than our estimate, due to conscious exit from its low-margin ROW business stream and muted growth in digital application services (adjusted revenues inline). The management remained confident on its deal wins (TCV of USD 160mn in Q1FY20) and its pipeline and expects it to exceed the previous year record deal wins of about USD 700mn. We believe that healthy deal wins and higher demand in digital services are likely to lead to strong revenue growth in the next few...

Hi-Tech remains the key vertical, which is expected to drive this digital growth. Customers from Independent Software Vendors (ISVs) and Internet/Social/Mobile (ISM) sub-segments are spending heavily on digital which needs to be tapped. Acquisition of Indigo Slate and Foolproof has helped add more clients in this segment.