Zensar Technologies Ltd. share price target

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.

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...