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Maintain ADD on Zensar Technologies - Margin reset, growth to catch up - HDFC Securities

Posted On: 2021-01-27 09:05:36 (Time Zone: Arizona, USA)

Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain our ADD rating; Zensar reported excellent margin performance (decade-high) but the growth engine is still under pressure (-3.7% QoQ CC). The fall in revenue was due to stress in the Hi-Tech vertical (-10.2% QoQ); ex Hi-Tech, revenue was up 3.5% QoQ. Project closures and lower spending by top clients led to the decline. However, Zensar has not lost wallet share in the account, and revival will take another 1-2 quarters. Under the new CEO, the company will focus on reviving growth, maintaining a margin profile in a narrow band, and close large deals. TCV wins stood at USD 200mn (+14.3% QoQ) and the deal pipeline improved to USD 1.7bn (highest ever). Margin expansion of ~560bps in 9MFY21 was achieved by cost optimisation, offshoring, and lower subcontracting cost. Margin expansion will be limited as the company will have to invest in S&M to fuel growth. The company is now debt-free and has net cash of USD 160mn (22% of Mcap). We increase our EPS estimate by 3.2/5.0% for FY22/23E to factor in better margin. Our TP of Rs 260 is based on 14x Dec-22E EPS. The stock is trading at a P/E of 15.3/14.2x FY21/22E EPS, which is a ~13% premium to the 5-year average.

3QFY21 highlights: Zensar's revenue came in at USD 122.8mn, -2.4/-10.9% QoQ/YoY, lower than our est. of USD 130mn. The revenue decline was led by Hi-Tech (-460 bps), offset by currency (+120bps) and productivity (+90bps). Consumer recovery continued (+6.2% QoQ CC). Banking (+1.3%) and Insurance (-8.7%) will recover. Digital is now 65% of revenue, down 0.6% QoQ, while Legacy fall continues to be steep (-5.6% QoQ).

EBIT margin expanded 106bps QoQ to 15.9% vs. our expectation of 13.7%. Margin expansion was led by SG&A optimisation (+140bps), offset by volume and utilisation impact of 100bps QoQ. Margin will fall in 4Q due to wage hike impact. We expect revenue growth of -11.8/6.8% in FY21/22E and revenue/EPS CAGR of +7.6/+10.2% over FY21-23E.

Shares of ZENSAR TECHNOLOGIES LTD. was last trading in BSE at Rs.240.25 as compared to the previous close of Rs. 237.25. The total number of shares traded during the day was 14046 in over 512 trades.

The stock hit an intraday high of Rs. 241.85 and intraday low of 233. The net turnover during the day was Rs. 3351795.

Source: Equity Bulls

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