Zensar Technologies. Zensar Technologies: Digitally sound - Buy

In the rally witnessed in the IT space over the past six months, most mid-tier stocks in the segment have turned expensive. There are very few software services players available at reasonable valuations.

Zensar Technologies is one such company that is available at relatively cheaper valuations and has robust business prospects.

Traction across key verticals, the ability to tap into digital opportunities offered by its top clients and improvements in key operational parameters are positives for the company.

Zensar is focused on a limited set of segments — manufacturing, retail and financial services. Its focused offering across verticals and service lines means that it has been able to deliver well, operationally, over the past several years.

It has been careful not to spread itself thin across too many segments.

Investors with a two-year horizon can buy the shares of Zensar. At ₹1,244, the share trades at around 14 times its likely per share earnings for FY-20.

This valuation multiple is much lower than the 18-20 times that peers such as Mindtree and Hexaware trade at. In FY-18, Zensar’s revenues grew by 5.8 per cent over the previous fiscal, in dollar terms. It recorded revenues of ₹3,108 crore for 2017-18; net profits came in at nearly ₹242 crore.

The relatively low top-line growth was due to a weak first half last fiscal. In the second half of FY-18, revenues bounced back as the company’s key verticals fired and Zensar expanded its digital footprint. In fact, the fourth quarter saw Zensar record double-digit revenue growth.

Digital thrust

The company derived 38.2 per cent of its revenues in FY-18 from digital offerings, where clients are incrementally spending a lot more, up from 30 per cent in 2016-17.

This proportion is among the best in the industry, indicating that the company has been able to latch on to the digital bandwagon comfortably with its offerings in areas such as IoT, cloud and analytics.

Zensar has been able to make considerable inroads into its existing top 20 clients with its digital services portfolio, and has been able to tap into incremental spends of these customers, suggesting robust execution capabilities.

Manufacturing (48.7 per cent of revenues), retail (28.8 per cent) and financial services (19.4 per cent) are the key verticals in which the company operates.

The latter two segments have been growing at a healthy pace; after lagging in the initial part of last fiscal, manufacturing too witnessed reasonable traction. The company also has robust offerings catering to growth areas such as e-commerce.

Zensar derives 83.4 per cent of its revenues from delivering application management services, which offer better margins, and 16.6 per cent from infrastructure services.

Its robust service mix has enabled the company to gain from growth opportunities.

Customer additions have been quite healthy for Zensar. Last year, it added six clients in the $5-million bucket and 92 new customers last fiscal.

Operational push

Fixed price contracts, which enjoy better margins compared to time and material projects, contributed 52 per cent of the company’s revenue in FY-18, an increase of more than 3 percentage points over 2016-17.

Repeat business is at a robust 87.1 per cent, up from 76 per cent in the previous year, indicating that Zensar has mined its existing customers well for newer opportunities.

As a result of this higher repeat business, the company’s sales and marketing expenses have reduced in 2017-18, compared to FY-17.

Utilisation, at 84.4 per cent, is much higher than the 75-80 per cent delivered by most mid-tier peers. Zensar also has a deal pipeline of $700-750 million as of March 2018, that is worth nearly 1.5 times its FY-18 sales, thus giving it substantial revenue visibility.

Attrition, a key operational risk, has reduced and is at a reasonable 14.9 per cent as of March 2018.

One area where there is scope for improvement is the company’s expensive onsite deployments.

But digital engagements tend to be onsite heavy; the shift to offshore locations once the projects reach a mature stage would shore up margins.

After a couple of relatively weak years, Zensar now appears to be on course to deliver better revenue growth than what the trade body Nasscom has projected for the industry in FY-19 — 7-9 per cent — thanks to the revival in its earnings momentum.

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