Zensar Technologies Ltd. share price target

24 October 2018 ZENTs 4.1% QoQ CC growth was marginally below our estimate of +4.5%. Excluding the contribution of Indigo Slate (USD4m), organic growth of ~1.8% QoQ CC was lower than expected. EBITDA margin shrank by just 20bp QoQ to 12.7% (80bp beat), primarily led by improved margins at IMS. PAT of INR934m grew 14% QoQ, marginally below our estimate of +16%, primarily because of the slight revenue miss. Organic growth in the quarter was impacted by project closures in Retail (-8.7% QoQ CC). Apart from this, strategy execution grew by 7% QoQ CC and now constitutes 44% of total revenue. continued gaining momentum post the recent restructuring. Growth stood at 20% YoY in 2QFY19 (as against -2% YoY in 2QFY18). showed strength, with the top 5/6-10 growing by 26/19% YoY. at USD290m in 1HFY19 continued improving; the pipeline at >USD800m is the highest-ever.

Good set of numbers: Zensar Technologies reported revenues which were in line with estimates. EBITDA (up 63% YoY), EBITDA margin (up 330 bps YoY) and PAT (up 75% YoY) were above estimates due to a) better utilization (85.8 vs83.8/83.2 QoQ/YoY) b) high gross margins c) higher volume growth and d) higher other operating income.

Maintain BUY with a TP of Rs 1,445 based on 16x FY20 EPS. Zensar delivered a robust quarter both on the revenue and margin front. Revenue came in at USD 135.0mn (+6.6% QoQ, 7.5% CC & +2.0% ex Cynosure), higher than our estimate of USD 130.0mn. Growth was led by Digital & Application services (DAS), up 7.0% QoQ and recovery in Cloud and Infrastructure Services (CIS), +12.6% QoQ. EBITDA margin expanded 132bps to 13.5% (vs. estimate of 13.1%) led by higher utilisation (+200 bps QoQ), integration of higher margin Cynosure and recover in CIS (earlier IMS).

Large deal wins & consistent Digital growth to aid Profitability Revenue & margins above expectation helped by inorganic growth ZENT reported USD revenue growth of 6.6% QoQ (7.5% in CC terms) to USD 135mn (DCMe: USD 130mn) primarily led by inorganic growth of 4.6% QoQ in USD terms. INR revenue grew 11% QoQ to ` 9.05bn (DCMe: ` 8.68bn) positively impacted by rupee depreciation. EBIT margin improved 75bps QoQ to 10.8% (DCMe: 10.5%) on back of volume growth, improved utilization and FX tailwind. PAT improved 13.1% QoQ to ` 822mn (DCMe:...

Maintain BUY with a TP of Rs 1,400 based on 16x FY20E EPS. We recently met Zensars management and were enthused with the transformation under way, under the new leadership team. Notably, Zensar lagged peers in growth (3.2% revenue CAGR for FY16-18 vs ~11% for mid-cap IT), owing to (1) IMS restructuring, (2) Lack of large deal wins, (3) Slow down in Oracle ATG, impacting revenues at the acquired PA business (4) Drag in non-core business (-17% CAGR).

As Digital scales up, profitability should follow suit Approach to Digital reaping dividends: Digital has been growing at more than 30% and now contributes 41% of ZENT's total revenue. More than 80% of the business has been home-grown; the company will continue developing new solutions to further strengthen this segment. Marked by Return on Digital' proposition: ZENT's Return on Digital (ROD) framework is now part of every deal, with everything being native digital, mobile and cloud. The suite has various platforms that are made for distinct...

Maintain BUY with a TP of Rs 1,350 based on 16x FY20 EPS (earlier 15x). Zensar delivered healthy revenue growth in 4QFY18 while margins performance stood below expectation. Revenue came in at USD 126.6mn (+3.3% QoQ), in-line with our estimate of USD 126.3mn. Growth was led by AMS (86% of rev, +7.0% QoQ) offset by drag in IMS (-14.2% QoQ).

ZENT's 3.3% QoQ growth was in line with expectations. However, CC revenue growth was 1% v/s estimate of 1.9%, while tailwinds from cross-currency were stronger. 7% QoQ growth in Applications was partly offset by a 15% sequential decline in IMS. Digital continued exhibiting strength, growing at 8% QoQ. It now constitutes 41% of total revenue. Revenue in the US grew 3% YoY in FY18. However, in 4Q, its YoY growth was 10.8% YoY ??? a clear indication of momentum pick-up.

Maintain BUY with a TP of Rs 1,050 based on 14x Dec-19 EPS Zensar delivered healthy revenue growth and margin beat in 3QFY18. Revenue stood at USD 122.6mn (+3.4% QoQ, +3.5% CC), higher than our estimate of USD 121.5mn. Growth was led by AMS (83% of rev, +3.1% QoQ) and revival in IMS (+4.6% QoQ). EBITDA margin expansion of 165bps to 13.4% (vs. estimate of 12.3%) in a seasonally weak quarter was a positive surprise. Margin expansion was led by increase in fixed price contracts (+8.0% QoQ).

ZENT's 3.4% QoQ growth was above our estimate of +1.5%. Strong growth despite seasonal weakness was led by 9% QoQ growth in Digital, which now constitutes 39% of total revenue. Gross/EBITDA margin expansion of 130/170bp was mainly driven by higher growth from Digital and efficiencies led by internal deployment of its Return on Digital proposition. PAT of INR574m (-5.7% QoQ) bettered our estimate of INR549m (-9.7% QoQ), led by the overall operational beat. Besides revenue growth,validation of ZENT's reformed offerings comes from its USD100m TCV deal wins, most of which are in Digital. It has also infused these offerings in its top customer, making the otherwise traditional IT support account more balanced. Vinci, its autonomics offering in Infrastructure, is running pilots with multiple customers, which are likely to convert into deals over coming quarters, propelling the services business in IM, which grew 7.5% QoQ in 3Q.