Margins continue to improve…
Zensar Technologies (Zensar) reported Q1FY21 numbers. Dollar revenues fell 7.0% QoQ mainly due to a decline in retail & financial vertical that dipped 23% QoQ, 14% QoQ. However, EBIT margins increased 20 bps to 10.0% mainly led by forex gain (40 bps), SG&A optimisation (20 bps) partially offset by lower utilisation. The other key positive was fall in debt by ~US$15.5 million (~| 116 crore) QoQ and DSO days dipping by 12 days QoQ to 75 days. The company saw order booking of US$150 million in the quarter (book to bill ratio of 1.15x) and also has healthy deal pipeline (US$1.5 billion).
FY22 to see revival in revenues
The company saw a healthy improvement in its deal TCV (up 36% QOQ) and has healthy deal pipeline of US$1.5 billion. Also, Zensar’s hi tech (46% of revenues) vertical saw an improvement of 3.5% QoQ (in CC terms) in the quarter, which is expected to further improve in coming quarters. This coupled with bottoming out of retail vertical, improvement in cloud revenues and ramp up of projects will lead to healthy improvement in revenues on coming quarters. The company has also hired Nachiketa Mitra (from cognizant) to boost its financial service (~26.6% of revenues) segment in the long term. This coupled with healthy cash on the balance sheet we expect the company to pursue inorganic acquisition. Hence, we expect the company to register improving revenue growth in long term. However, in the near term despite assuming QoQ improvement in revenues we expect the company to register 7.8% YoY dip in FY21E dollar revenues due to significant dip in Q1FY21 revenues. Thereafter, we expect the company to register 8.0% YoY increase in FY22E dollar revenues.
Margin outlook remains positive
Zensar showed significant margin improvement in past two quarters. Going forward, we expect Zensar to continue maintain healthy margins mainly led by improvement in utilisation (that dipped 130 bps in Q1FY21), cost rationalisation in SG&A, lower sub-contracting cost and higher offshoring. Hence, we revise our EBITDA margin estimates upwards to 14.8%, 14.9% in FY21E, FY22E from previous estimate of 11.9%, 12.5%, respectively.
Valuation & Outlook
The company witnessed healthy traction in order booking. This coupled with bottoming out of retail vertical, improvement in cloud revenues and ramp up of projects will lead to healthy improvement in revenues on coming quarters. Further, with healthy cash in balance sheet we expect it to pursue inorganic acquisition. Hence, we expect Zensar to register improving revenue growth in long term. Further, we expect the company to witness improved traction in margins. Hence, we revise our target price upwards to | 155/share (10x FY22E PE). However, considering recent run up in price we maintain HOLD rating on the stock.
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