The Hindu Business Line : Zensar Technologies: Hold

Investors can retain their exposure in the Zensar Technologies (Zensar) stock. At the current market price, the stock trades at a price-earnings multiple of 13 times its consolidated 2006-07 per share earnings.

It may be advisable for investors to consider an entry into the stock only on weakness linked to the broad market. We have a `buy' call outstanding on the stock at Rs 213 made in end- September 2006.

The company's strengths stem from its broad-based portfolio of service offerings, robust client additions, scope for acquisition-led growth and reasonable growth potential from these levels. However, as a mid-cap stock, Zensar's valuation may be influenced by its high client concentration, prospects of slowdown in IT spending in the US later this year and slower-than-expected shift in offshoring by its new clients (both organic and inorganic).

Key variables

Zensar's performance in 2007-08 is likely to be dictated by the following variables:

Broad-based portfolio: Zensar operates five business segments — Application portfolio management (APM), enterprise application services (EAS), innovative technology solutions (ITS), business process outsourcing and optimisation (BPO) and consulting services. APM has been the company's key contributor, accounting for 53 per cent of its revenues and 83 per cent of its profit before interest and tax (PBIT) for 2006-07 announced recently.

However, over the past year, the contribution from EAS has risen significantly to 28 per cent of revenues (from 21 per cent in the previous year), while PBIT share has more than doubled to 26 per cent (from 21 per cent in the previous year).

This trend is also reflected in the PBIT margin, which improved for EAS to 13.5 per cent in 2006-07 from 6.7 per cent in the previous year. The PBIT margin from APM also improved by two percentage points to 22 per cent for 2006-07. While the company has staged a turnaround in its contribution from BPO, its share from consulting services, the new segment added this year, has been fairly healthy.

The only disappointment has been the contribution from the ITS segment, whose revenues have also dipped from the previous year, and it has also incurred operating losses. This segment offers services that range from application modernisation, embedded systems, product engineering services and legacy migration.

Client mining: While the top ten clients of Zensar account for 69 per cent of revenues for the year ended March 31, 2007 (up from 60 per cent in the previous year), the company is well-placed to mine its existing clients in different areas.

For instance, it has increased the number of clients in the $1 million-$5 million bracket to five in 2006-07 from three in the previous year. This also reflects its long-standing client relationships with the Mark and Spencer, National Grid, Credit Suisse, Cisco, among others.

In addition, of the 236 active clients, 222 are below $0.5 million, and this offers ample opportunity for scale-up of select clients in the coming quarters.

Inorganic growth: Over the past quarter, the company has put through two key growth initiatives. One, it has acquired the US-based ThoughtDigital Inc. through its US subsidiary for an all-cash consideration of $24.9 million.

ThoughtDigital specialises in Oracle implementation, with clients in the communication, financial services and media space. It had reported revenues of $27 million for the year-ended December 2006.

It is expected to strengthen Zensar's presence in the enterprise applications space. Two, it recently entered into a 60:40 joint venture with the Tokyo-based software company, EZA.

This is likely to help Zensar get a foothold in the niche areas of media and entertainment in the Japanese market.

More Stories on : Stocks | Recommendation | Software

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page