Zensar Technologies Ltd. share price target

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...

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...

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 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.

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).