Zensar Technologies (Buy)

CMP: ₹246.5

Target: ₹275

Zensar delivered solid results for Q4FY19, with a beat on dollar revenues, EBITDA margin and net profit. Three-and-a-half year after Sandeep Kishore took over as the CEO, the company has finally delivered a turnaround in revenue growth. For FY19, Zensar delivered 17.6 per cent dollar revenue growth (9.3 per cent organic and rest from Cynosure and Indigo Slate acquisition).

Led by strong Q4 exit revenue runrate, we expect Zensar to deliver 13/13.4 per cent dollar revenue growth in FY20/FY21E (versus 12/13.4 per cent modelled earlier) — organic revenue growth in FY20E would be about 12.1 per cent and the rest owing to the full impact of IndigoSlate acquisition. While Zensar has shown an uptick in revenue growth, led by improved pipeline and deal wins, EBITDA margin remains sub-optimal (12.4 per cent for FY19).

We expect margins to improve in FY20/FY21E, led by exit from non-core businesses, moderation in sub-contracting expenses, improvement in utilisation rates and SG&A leverage. We retain our EPS estimates for FY20/FY21E. Zensar’s valuations look reasonable at 12.5x FY20E EPS, a 19 per cent discount to Mindtree.