Published on 18/06/2019 10:27:32 AM | Source: Motilal Oswal Securities Ltd

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Traction in growth and margins despite tight supply

We attended the RPG Group analyst meet, where ZENT management shared its views on the key verticals and the strategy going ahead. Key highlights:

Targeting Digital to be two thirds of revenues in next three years

* Digital contributes 45% of revenues and is expected to exceed 60% in 3-4 years.

* Hi-Tech remains the key vertical, which is expected to drive this digital growth. Customers from Independent Software Vendors (ISVs) and Internet/Social/Mobile (ISM) sub-segments are spending heavily on digital which needs to be tapped. Acquisition of Indigo Slate and Foolproof has helped add more clients in this segment.

* Digital has only slightly higher onsite mix than non-digital. From 2,200 digital employees, 1,200 are in the US and the rest are based in the UK and South Africa.


Cloud Infrastructure services (CIS) will be a key driver of momentum

* CIS formed 15.6% of FY19 revenue, of which core CIS (non MVS) accounted for 11%. Management remains committed to inch up the core CIS share to 20-25% of overall revenue over the next three years.

* Preference for the cloud business stems from the following factors:

[1] CIS business is a margin-accretive business, commanding ~150-300bp higher margins than company average.

[2] Unlike other verticals, the cloud business is less dependent on people, and thus, is relatively immune to supply pressures at onsite locations.

[3] ZENT has fully refreshed its team and hired heads from Tier 1 companies.

[4] There is annuity built in the cloud deals, and thus, it offers higher visibility on revenue recognition.

* ZENT has built a strong position in the cloud space with its service offerings continuously aligned with the winning technologies. It competes with Tier-1 in larger cloud deals.


Four acquisitions, all growth boosters

* ZENT has completed four acquisitions till date since its overhaul began three years ago. All of the acquired companies have been driving growth for the company.

* Two of the acquisitions (Foolproof and Indigo Slate) are in the experience design space, while the other two (Keystone and Cynosure) are levers for capability enhancement.

* The company’s experience design space focuses on two functions – intellectual or experience research and technology around design. Foolproof caters to the former and Indigo Slate to the latter.


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