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  • Stock recommendation: Zensar Technologies Ltd – ACCUMULATE – TP Rs.1373

    Publish date: August 14, 2018


    Result Update

    Zensar's 1Q revenue grew by 6.6% QoQ (2% without Cynosure) in USD terms to USD135mn, higher than our estimate of USD 129mn largely due to integration of Cynosure. EBITDA margins expanded by ~140bps QoQ to 13.6% led by higher utilization and integration of high margin Cynosure.

    Key Highlights

    • Digital has been the key focus area for the company and grew by 12.8% sequentially and now stands at 43% of the total revenue. Growth was led by Analytics, Cloud, Mobility and Automation. Digtial has been gaining momentum on back of several solutions built over last year.
    • Company won three large (USD 50mn+) deals during the quarter. Digital deal sizes are increasing and the overall deal pipeline remains healthy for the company at USD 600mn. Company is working with advisors and has a differentiated strategy of platform plus services which is helping in gaining traction and company being invited for more RFPs.
    • Zensar has been aggressively consolidating its non-core verticals and service lines. Company now focus on strategic accounts which have a capability to scale up digital. Digital deal sizes are small currently, but nearly 50% of new deal wins are from area of digital which indicates good progress towards adoption of digital.
    • Zensar acquired four companies in the last two years. Keystone, Fullproof, Cynosure are fully integrated and the latest Indigo Slate is expected to be integrated in next two quarters. New and existing engagements are both contributing to the revenue growth. The acquisitions have also been an integral part of new deal wins.

    Valuation & Outlook

    • At current price of Rs.1249, stock is trading at 17.2/14 P/E on FY19/FY20 estimates. We raise our estimates for FY19-20E EPS due to integration of Indigo Slate, organic revenue acceleration and higher EBITDA margins on better than expected management of operations and change in currency assumption. We raise our target price to Rs.1373, valuing the stock at 15.5x (same as earlier) FY 2020E EPS. Maintain ACCUMULATE.

          

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