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Management change yielding results…

About the stock: Zensar Technologies (Zensar) offers application & IMS services to hi-tech, manufacturing, retail and BFSI.

* Zensar has grown organically and inorganically over the years

* Net debt free and healthy double digit return ratio (with RoCE of 19%)

Rationale:

* The company grew at ~5% CAGR in FY16-21, lagging its peers. As it goes through a turnaround, we expect it to grow at 12.6% CAGR in FY21-23E

* Margins improved from 14.8% in FY16 to 18.1% in FY21 due to higher offshoring and lower employee costs. The improvement in margin trajectory is expected to continue

* The company has seen healthy client addition in Q2FY22. Client mining and new logo additions are expected to scale up revenues further

What should investors do? Zensar’s share price has grown by ~2.6x over the past five years (from ~| 175 in December 2016 to ~| 470 levels in December 2021).

* We remain positive on the stock and maintain BUY rating

Target Price and Valuation: We value Zensar at | 565 i.e. 24x P/E on FY23E EPS

Key triggers for future price performance:

* Zensar is addressing key shortages of the past. The new CEO has devised a strategy to focus on the experience side and build capabilities in digital engineering, data, artificial intelligence and machine learning

* Driving deal momentum, annuity revenues, increasing investment in sales & talent, leadership and tuck-in acquisition to build capability bode well for long term revenue growth

* Expect dollar revenue CAGR of 11% over FY21-23E

Alternate Stock Idea: Apart from Zensar, in our IT coverage we also like Infosys

* Key beneficiary of improved digital demand, industry leading revenue growth and healthy capital allocation prompt us to be positive

* BUY with a target price of | 2,060 

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