Broker’s Call: Zensar Technologies (Buy)

Target: INR 380

CMP: INR 339.65

Zensar Technologies It’s showing clear signs of a turnaround in terms of margins – the company saw a 457 basis point improvement in gross margins, driven by utilization and offshoring (this appears sustainable); and 34% quarter-over-quarter growth in order book (1.2x invoice history). In addition, the company is taking the right steps to improve revenue in the long term – such as incentivizing sales for large deals and cross-selling; restructuring of the organization from a geographic to a vertical focus; And contract with COO and CBO to drive growth.

The company has, over the past few years, expanded its services from two service lines like Infra and ADM to SAAS (with Salesforce, SAP and Oracle), data, advanced engineering (new technology services) and expertise. Together, these services account for 35 percent of revenue and the company plans to sell them to existing customers, thus improving long-term growth.

In the near term, we have lowered our revenue estimates to 3.5% YoY, however, we expect revenue to improve 12% YoY in FY25. This coupled with improving margins and structural changes in the organization is driving us to increase our multiple to 15 twice as much as 12 times as much. We maintain our Buy rating on the stock with a price target of INR 380 per share.

We believe margins for the current quarter were driven more by utilization and offshoring (which appears sustainable). Going forward, we believe the company has additional scope in utilization and subsidiary frictions. Zensar is aiming for mid-teen margins by Q2 FY24. We built conservatively 14.0% and 15.5% EBITDA margins for FY24 and 25 respectively, resulting in a PAT CAGR of 32.7% during FY23 -25.