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Centrum Broking
Zensar Technologies (Buy)
CMP: ₹220.75
Target: ₹265
We met the management of Zensar to get a business update.
Zensar remains optimistic on revenue growth outlook and turnaround in margin trajectory. Transition costs led by ramp up of multiple new deals, higher subcontracting expenses (about 17 per cent of revenues as on 3QFY19) led by tepid margin performance in 3Q. Management believes that worst is behind on the margin front in 3QFY19 and expects gradual improvement over the coming quarters. Company expects to gradually reduce the subcontracting expense which would be a margin lever.
Zensar remains bullish on demand and cited increased investments in hiring to tap this demand. Company is expanding its facilities in India (Pune, Hyderabad and Bengaluru) and aims to create 1,500 new seat capacity to fulfil this demand (Zensar headcount at 9,813 employees as on 3QFY19). We expect Zensar to deliver 16.9 per cent dollar revenue growth in FY19E (8.5 per cent organic growth).
While Zensar has shown an uptick in revenue growth, led by improved pipeline and deal wins, EBITDA margin remains suboptimal (12.3 per cent for FY19E). However, we expect margins to improve in FY20/FY21E, led by exit from non-core businesses, improvement in utilisation rates and SG&A leverage. Zensar’s valuations look attractive at 10.7x FY21E EPS, a 25 per cent discount to Mindtree.
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