Maintain ADD on Zensar Technologies - Margin reset, growth to catch up - HDFC Securities
Posted On:
2021-01-27 09:05:36
(Time Zone: Arizona, USA)
Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities
We maintain our ADD rating; Zensar reported excellent margin performance (decade-high) but the growth engine is still under pressure (-3.7% QoQ CC). The fall in revenue was due to stress in the Hi-Tech vertical (-10.2% QoQ); ex Hi-Tech, revenue was up 3.5% QoQ. Project closures and lower spending by top clients led to the decline. However, Zensar has not lost wallet share in the account, and revival will take another 1-2 quarters. Under the new CEO, the company will focus on reviving growth, maintaining a margin profile in a narrow band, and close large deals. TCV wins stood at USD 200mn (+14.3% QoQ) and the deal pipeline improved to USD 1.7bn (highest ever). Margin expansion of ~560bps in 9MFY21 was achieved by cost optimisation, offshoring, and lower subcontracting cost. Margin expansion will be limited as the company will have to invest in S&M to fuel growth. The company is now debt-free and has net cash of USD 160mn (22% of Mcap). We increase our EPS estimate by 3.2/5.0% for FY22/23E to factor in better margin. Our TP of Rs 260 is based on 14x Dec-22E EPS. The stock is trading at a P/E of 15.3/14.2x FY21/22E EPS, which is a ~13% premium to the 5-year average.