Buy Zensar Technologies - Microsec

We rate Zensar Technologies Limited (Zensar) a BUY. Our rating underpins the company's strong organic top line growth led by depreciation of INR against the USD, successful integration of Akibia, and initiatives to unlock value. However, a reversal in currency movements, which remained one of the key contributors for Zensar's healthy performance, may impact the company's performance.

Depreciating INR boosted organic top line. Zensar reported a healthy top line expansion in FY2012 led by significant depreciation of INR during the year. With this, Zensar's top line, on an organic basis, increased 19.7% y-o-y in FY2012. Continuing with its performance in FY2012, the company reported a notable 36.5% y-o-y expansion in revenues during Q1 FY2013 as well.

Successful integration of Akibia adds value. The acquisition of Akibia during FY2011 enabled Zensar to strengthen its presence in the expanding Infrastructure Management and Information security space. Furthermore, with its expertise to support and secure missioncritical data centers, Akibia enabled Zensar to offer full life cycle capabilities to service its global clientele.

The acquisition supported the company to report notable client additions in FY2012. The company added 112 new clients during the year, leading its total client base to over 400 during the year. The acquisition, equipping Zensar with enhanced offerings, is likely to help it report healthy client additions in upcoming quarters as well. Moreover, including Akibia, the company's top line increased whopping 56.6% y-o-y to INR17,824.8 Mn in FY2012.

Initiatives to enhance shareholders' value are commendable. In addition to interim dividend of INR3.0 per share, paid during the year, Zensar announced a final dividend of INR4.0 per share at the end of FY2012. This brings the total dividend payment, by the company, to INR7.0 per share, just double of INR3.5 per share in FY2011. With a good value unlocking history and sufficient cash balances despite an acquisition recently, Zensar is expected to continue its value generating initiatives in the upcoming years as well.

Valuation

Zensar traded at an average PE of 5.66x in last five years. At CMP of INR253, the stock trades at a PE of 6.99X of FY2012 EPS. In addition, the CMP discounts Bloomberg consensus FY2013E and FY2014E earnings at 5.74x and 5.12x, respectively, which looks attractive from an investment point of view.

Key Risk

Depreciation of INR against the greenback remained one of the principal reasons for growth in Zensar's top line. Although the home currency further depreciated in Q1 FY2013, a trend reversal in the same may negatively impact the company's performance, going forward. Furthermore, an appreciation in INR may adversely affect Zensar's margins, thereby may lead to lower than expected growth in EPS. In addition, as over 70% of the company's revenues come from the US, it could intensify the impact of appreciation of home currency on its performance.

Source : Equity Bulls

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