Neutral Zensar; target of Rs 750: Motilal Oswal

Motilal Oswal's research report on Zensar

ZENT reported a strong 1QFY25, with revenue growth of 4.3% QoQ in CC (est. 1.9%) driven by sequential growth across all verticals. Deal TCV came in at USD154m (-15% QoQ/flat YoY). EBIT declined 4% QoQ/9.0% YoY to INR1,714m and EBIT margin was down 130bp at 13.3% (-130bp QoQ). Margin fell short of our estimate of 13.9%, due to higher SG&A (+110bp QoQ, one-off due to bad debt provisions) and higher cost of delivery. PAT of INR 1,579m (-8.9% QoQ) beat our estimate of INR 1,454m, led by revenue growth and higher other income.

Outlook

ZENT reported a one-off impact (110bp) of doubtful debts from a customer’s bankruptcy filing. Adjusting for this, the company reported a margin of 16.3%, in line with its mid-teens margin guidance. The management aims to maintain mid-teens EBITDA margins and reinvest above that level for growth. We expect ZENT to deliver 15.9%/16.7% EBITDA margin in FY25/FY26. This will result in an INR PAT CAGR of 6.0% over FY24-26E (partially on high FY24 base). We increase our EPS estimates by 6.2% for FY25 on the back of growth surprise in 1Q. We largely maintain our EPS estimate for FY26. Our TP of INR750 implies 23x FY26E EPS. Retain Neutral.