Going about IT calmly

Among mid-tier IT players, only a few companies are able to offer healthy growth prospects backed by cheap valuations. Zensar Technologies belongs to this category. The company which is likely to exceed the industry growth rate in the current fiscal and also over the next few years.

The company offers mainly application management and infrastructure services; so, it is not subject to vagaries in the discretionary spends of clients.

It is also present predominantly in a limited set of segments — manufacturing, retail and insurance. This focused offering across verticals and service lines means that it has been able to deliver well operationally over the past few years. It has been careful not to spread itself thin across too many segments.

Healthy client additions, traction across its key verticals, and entrenched presence in the US markets are key positives for the company. Investors with a two-year horizon can buy the shares of Zensar. At ₹618, the share trades at well under 10 times its likely per share earnings for 2015-16. This valuation multiple is much lower than the 15-18 times peers such as Mindtree, Hexaware and Cyient trade at.

In the nine months of the current fiscal, Zensar’s revenue rose 15 per cent over the same period in 2013-14 to ₹1,970 crore, while net profit increased 5.8 per cent to ₹193 crore. The relatively lower growth in profit has been due to higher outflow on employee expenses and lower forex gains this fiscal compared with the previous, as the rupee had then fallen sharply against the dollar.

Zensar derives 76 per cent of its revenue from the US and 10 per cent from Europe. While the US economy is expected to be on the upswing, the company’s exposure in Europe is to the UK, which has been relatively resilient compared with several other countries in the region. Africa is another key geography where growth has been sturdy.

The relatively higher exposure to the US and limited presence in Europe has meant that Zensar has not been affected by the weakening of the euro against the rupee, which has hurt several mid- and top-tier IT players’ realisations.

Manufacturing, retail and distribution (68 per cent of revenues) and insurance, banking and finance (19 per cent) are the key verticals in which the company operates. It also partners with global software and hardware majors to earn a minor portion of its revenue.

The company also has a key presence in the e-commerce space. These segments have grown across the board for many IT players as have areas such as e-commerce. Zensar thus appears to be tapping into relatively lucrative segments.

The company derives 70 per cent of its revenues from delivering application management services and 20 per cent from infrastructure services, with the rest coming in from products and licences.

It has also been able to win deals in the digital space. Thus, it has a fairly robust service mix that is growth-oriented and also immune to fluctuations in client spends.

Customer additions have been quite healthy for Zensar. In the last year, it added one client in the $10-million bucket, five in the $5-million category and increased its count of $1 million customers by 24. Fixed price contracts, which have better margins compared to time and material projects, contribute 40 per cent of the company’s revenue currently, an increase of 4 percentage points over last year.

Utilisation, at 79 per cent, is much higher than the 70-75 per cent delivered by most mid-tier peers.

Zensar also has a deal pipeline of $300 million as of December, which gives it substantial revenue visibility. One area where there is scope for improvement is the company’s expensive onsite deployments.

While most mid-tier companies derive only 45-50 per cent of their revenue from projects executed onsite, the proportion for Zensar stands at 67 per cent. This together with any pricing pressure from peers can affect the company’s margins.