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Our Take:

Zensar’s primary business involves providing digital and technology solutions to global customers. It is engaged in key business verticals like high-tech manufacturing, infrastructure and BFSI. The company intends to continue its focus on cloud and digital transformation and has been targeting on improving its deal pipeline. Along with this, it also plans to use excess cash to acquire meaningful targets and bag new M&A deals.

Zensar’s deal booking momentum was strong at US$ 200 mn, with deal pipeline having expanded QoQ; it is at an all-time high level of US$1.7 bn+. Around 50% of pipeline is in large deals and the company is seeing momentum in BFSI and Digital Foundation Services (DFS). We expect strong recovery from supply side constraints and recovery because of the ramp-up in new deal wins. However, spending from top clients is likely to remain tepid. The company is optimistic about demand in the digital and retail services, but we believe these could recover at a relatively slow pace.

Zensar will continue investing in the sales & solution team and leadership team, bring in new capabilities, and grow inorganically. In the DFS business, investments around cloud business, digital product engineering, data engineering, analytics and AI/ML (Artificial Intelligence/Machine Learning) areas will be continued. Also, for bagging larger deals, if the margins in a particular deal are quite comfortable, the company is likely to undertake investment. We expect that the company to continue investing in these verticals and focus on leveraging strengths to drive growth.

Valuations & Recommendation:

Zensar has a diversified mix of services and multiple long-term contracts spread across verticals, along with healthy cash on the balance sheet. We expect it to pursue inorganic acquisitions (in cloud or software engineering side). Hence, we expect revenue of the company to grow in the long term. Further, improving margins are expected to boost the bottom line. A visible and consistent growth in the digital business has resulted in stable and consistent growth in the past fiscal coupled with its legacy business performance.

Zensar is amongst the cheaper mid-tier IT Services stock; due to a reason of long term streak of growth underperformance. We think that a gradual turnaround in fortunes may be round the corner.

We believe the base case fair value of the stock is Rs 300 (14.75x FY23E EPS) and the bull case fair value of the stock is Rs 315 (15.5x FY23E EPS) over the next two quarters. Investors can buy at LTP and add further on dips in the Rs 242-246 band (12.0x FY23E EPS). At the LTP of Rs 274, the stock is trading at 13.5x FY23E EPS.

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