Chola Securities

Zensar Technologies (Buy)

CMP: ₹84.95

Target: ₹112

In 4QFY20 Zensar’s consolidated revenues declined by 3.7 per cent y-o-y to ₹1,017.8 crore (-0.3 per cent q-o-q in CC terms) mainly due to a decline across verticals except retail (due to lower base). EBIDTA declined by about 4 per cent y-o-y while margin for the quarter stood at about 12 per cent.

All three regions registered revenue growth in FY20 compared to FY19, US +3.3 per cent and Europe +10.4 per cent while Africa region registered growth of 26.9 per cent y-o-y; within Africa region SA accounted for 10 per cent of total revenue.

Valuation: Though management is making efforts to shift focus from retail to financial services and hi-tech, the impending weakness in these sectors remains a challenge. We believe that margin recovery guidance to earlier levels of 15 per cent in FY21 would be a challenge. Although the deal pipeline remains healthy, it has not been reflected in numbers so far.

The stock is currently trading at around a P/E of 6.6x/5.9x over F21/22 EPS. Given the challenging medium term outlook, we revise our target price to ₹112 based on P/E of 7.5x on FY22 EPS and upgrade the stock to a ‘Buy’ given compelling valuations.

Risks: Slowdowns in deal win traction and lower than expected growth in digital.