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JMFL
Zensar Technologies (Buy)
CMP: ₹245.20
Target: ₹290
We initiate coverage on Zensar Technologies with a ‘buy’ rating for a 20 per cent upside. We believe the business refocusing underway since the CEO change in 3QFY16 is nearing completion. Zensar Tech is positioning itself as a challenger to the scale players in clients with significant IT spend (7/15 of the top 20/40 clients are Fortune500 companies). While this may constrain margins and/or DSOs in the near-term the potential revenue upside could be significant, in our view.
Zensar Technologies also appears attractively placed in Digital (44 per cent of 2QFY19 revenues) with selective but scale presence in areas such as Oracle and Guidewire implementation services. Momentum is also picking up in the Cloud-centric large deals with $400 million TCV won over 1HFY19 and a 25 per cent y-o-y jump in the deal pipeline in 3QFY19.
We estimate these could drive 12 per cent dollar revenue and 16 per cent EPS CAGR over FY19-21 on stable margin assumptions. Return ratios/cash-conversion that weakened due to recent acquisitions should also get aligned to the industry average by FY20. Thus, at 0.8x PEG and 20 per cent average discount to peers, we find risk-reward attractive.
Key risks: Client concentration (47 per cent from the Top10) + high exposure to retail vertical (23 per cent revenues).
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