Zensar Technologies Ltd. share price target

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.

Background Zensar Technologies is an RPG Group company, with end-to-end services from IT development to business process outsourcing. In 4QFY19: revenue share from services: Application Management Services (84.7%), Infrastructure Management Services (15.3%).The Company's business is primarily classified into Manufacturing (51.8%), Retail & Consumer services (21.6%), Financial Services (22.2%), and Emerging (4.4%). The company's business is spread across USA (76.2%), Europe (14.9%), Africa (8.0%) and RoW (0.9%). It receives 67.4% of revenues from onsite and 32.6% of revenues from offshore. Fixed price...

Strong set of numbers: At $150.1 Mn, Zensar (ZENT) reported a strong growth in revenue 4.5% QoQ and 18.5% YoY.

Zensar's Q4FY19 was a beat on revenue at USD 150mn (Ple: USD 145mn) up Change in Estimates | Target | Reco 4.5% QoQ (4.1% cc terms). EBITDA margin improved by 134 bps QoQ to 12% (PLe: 11%) aided by operating leverage driven by stronger than expected...

Zensar's organic growth has improved (+11.5% in FY19) led by robust deal wins. Total TCV for the quarter stood at USD 250mn (+25% QoQ) and USD 750mn in FY19 (vs USD 600mn in FY18). The deal pipe-line is healthy at USD 1bn, ~60% of the pipeline is large deals (TCV >USD 10mn). We believe growth will continue in FY20/21E led by Digital traction, ramp-up in deals won and healthy pipe-line. EBITDA margin will recover gradually to 12.7/13.5% in FY20/21E led by better mix. We maintain our positive view on Zensar based on (1) Focus on POC led Digital sales, (2) Robust deal wins and (3) Growth visibility in core business. We build 12/18/18% Revenue/EBITDA/PAT CAGR over FY19-21E. Zensar trades at ~10% discount to Tier-2 average P/E multiple with second highest FY19-21E EPS CAGR. Risks include delay in ramp-up of large deals, onsite wage inflation and deterioration in deal wins. We maintain BUY on Zensar post better than expected 4QFY19. Growth in TCV (+25% YoY) and robust deal pipeline of ~USD 1bn provides growth visibility. Our TP is Rs 305 implying 16x FY21E EPS. Zensar is one of our Top picks in Tier-2 IT.

17.6% YoY to USD567m, EBITDA increased 30% YoY to INR4,766m (margin of 12%) and PAT rose 31.8% YoY to INR 3,137m. Organic revenue growth was ~9% in USD terms and in double-digit on factoring in the RoW 2 May 2019 discontinuation and the impact from cross currencies. ZENT announced a total dividend of INR2.8/share for FY19, which implies a payout ratio of 20%. 4QFY19 revenue increased 19% YoY (above our estimate of +15% YoY) to USD150m, with 50% of incremental revenue coming from strong QoQ growth in the acquired entities. EBITDA margin expanded 160bp QoQ (our outperformance here was driven by higher operational income and other income (INR279m v/s our estimate of INR156m). While growth in FY19 (organically) was driven by Hi-tech and Insurance verticals, Manufacturing should add to it in FY20. Retail should take another couple of quarters before returning to sustained growth. ZENTs EBITDA margin in the core business is 14.1% (93.

In-line Revenues: Zensar Technologies (ZENT) posted revenues that were inline with our estimates. It posted a revenue growth of 4% in USD and in constant currency terms, revenue was up 4.5%. Of this growth, nearly half of this is contributed by integration of IndigoSlate numbers for the full quarter.