Neutral Zensar; target of Rs 265: Motilal Oswal

Motilal Oswal's research report on Zensar

Zensar (ZENT)’s 3QFY21 revenue performance (decline of 3.7% QoQ CC) – impacted by restructuring at its top client – was below our already muted expectation. With the company guiding for a weak 4Q on continued drag from the top client, we expect double-digit decline (-12.1% YoY) for FY21E. n On the other hand, the 3Q EBIT margin (15.9%) was ahead of our expectation as it continued to benefit from the offshore revenue shift (+300bp QoQ; +910bp YoY). We expect the company to reinvest some of the gains from aggressive cost rationalization into growth and expect an EBIT margin of 14.8% in FY22E. n ZENT continued to report healthy deal wins with 3QFY21 TCV of USD200m, suggesting a book-to-bill of 1.6x. The deal pipeline also remained strong at USD1.7b, which is encouraging. However, we remain cautious on a leaking bucket and pockets of weakness in the ZENT portfolio. On account of these factors, we expect only a 9.0% revenue CAGR for FY21–23E (the lowest among peers). n While we trim our revenue growth estimates on a weaker-than-expected 2H FY21 performance, we remain positive on the company’s margin performance. n Despite required investments, we expect margins to inch up gradually from FY21E to FY23E. In our view, growth revival would be needed for a stock rerating despite inexpensive valuations. Our TP implies 13x FY23E EPS. Maintain Neutral.

Outlook

We expect the company's revenue to improve and PAT to grow in FY22, but would wait for any recovery before turning more constructive on the stock.

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