Published on 11/09/2019 10:46:04 AM | Source: Prabhudas Lilladher Ltd

Accumulate Zensar Technologies Ltd For The Target Rs.260 - Prabhudas Lilladher

Sustainability holds the key

Zensar delivered steady performance in Q1FY20 with marginal miss on revenues negated by strong beat on margins. Zensar posted revenue growth of 3.1% QoQ USD at US$ 153.3mn (Ple: US$154.6mn. Cons: US$156mn) slight below our estimates but EBITDA margin came at 14.2% vs our estimates of 12%. Strong revenue growth in cloud infrastructure business(CIS) of 17.3% QoQ CC contributed to revenue growth & aided margin growth as CIS is a high margin business (Ple:19%). Zensar recorded total bookings of ~USD 160 mn+ in Q1, with (FY19 bookings at USD 750 mn+) majority of wins in CIS business. Client mining strategy is yielding healthy results with Top 5/10/20 clients growing 6.0%/5.9/6.5% QoQ. While momentum has picked up, softness in Retail (ramp-down at two clients coupled with delay in ramp-up of a deal) is likely to keep momentum in the vertical muted. We believe execution holds the key to drive strong growth, which in turn will aid margin performance. Digital (48.5% of revenues) showed a sustained growth of 6.7% QoQ & 28.3% YoY on the back of clear focus on Automation driven by Cloud & Infrastructure platforms and RPA and we believe Zensar’s investment in Return on digital is showing them results. We maintain our FY20E/21E USD revenue estimate and expects USD revenue and EPS CAGR of 13.4% and 20.8% respectively over FY19-21E. Our TP stands at Rs 260 (13x FY21E). The stock trades at attractive multiple of 13.3x/10.8x FY20E/FY21E EPS of Rs 16/Rs 20. Maintain Accumulate.

* Marginal miss on revenues: Zensar’s Q1FY20 revenues came slight below our estimates at USD153.3mn, grew by 3.1% QoQ/16.4% YoY. Constant currency growth for the quarter stood at 3.6% QoQ/18.8% YoY. Among verticals, BFSI (up 8.2% QoQ), Manufacturing (up 5.8% QoQ), Emerging (up 20.8% QoQ) remain strong, However, Retail (down 10.2% QoQ in cc terms) remain tepid. Among geographies growth was broad based across all geographies. US (76.3% of revenues) grew by 2.3% QoQ, Europe (15% of revenues) up by 4% QoQ and Africa (8.7% of revenues grew by 14.7% QoQ in cc terms.

* Strong Growth in CIS business: CIS business grew by 17.3% QoQ in cc terms and accounted to 17.2% of total revenues in Q1FY20. We believe that strong recovery in CIS business has led to margin expansion in the quarter. CIS business is higher margin business (Ple: 19%). Digital sustained growth momentum by growing 7.2% QoQ in cc terms and now accounts to 48.5% of total revenues. We believe Zensar’s investment in Return on digital is giving them results.

* Strong beat on Margins: EBIDTA margin for the quarter came in at 14.2% up 109 bps QoQ/13bps YoY and beat our ests (PLe: 12%). EBIT margin came in at 10.7% flat QoQ (Ple: 10%). PAT came in at Rs788mn, inline with our estimates. Core business recorded 14.7% EBITDA margin (+70bps QoQ) and management is targeting to scale it to 15% in FY20. Management cited that there will be wage hike impact in next quarter which will be offset by operational levers. Headcount stood at 10,166 which implies net addition of 481 employees QoQ. Utilisation at 82.4% down 100bps QoQ. Attrition stood at 16.7% up 40bps QoQ. Management cited that seasonality impact on attrition has led to increase in attrition. Sub-contracting cost was lower at 15.2% of revenues (down 20bps QoQ and 10bps YoY) aided margins.


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