Neutral Zensar; target of Rs 570: Motilal Oswal

Motilal Oswal's research report on Zensar

ZENT reported a weak performance in 3QFY24 as revenue declined 3.2% QoQ in CC due to continued pressure in hi-tech vertical and higher furloughs. However, it was above our estimate of 4.4% QoQ decline. Deal TCV rose 28% YoY to USD168m but fell 14% sequentially from its peak in 3QFY24. Adjusted EBITDA margin was in line with our estimate of 16.2%, with reported EBITDA margin down 140bp QoQ due to the reversal of bad debt provisions. ZENT management expressed optimism on growth in most of its verticals, but it sees constraints in hi-tech (26% of revenues) segment, including extended furloughs. The weakness in hi-tech has impacted the overall growth of the company, leading to YoY decline in revenue for the last five quarters. We continue to see muted growth in 4Q as well, resulting in a weak exit and in turn impacting FY25 revenue growth. Given the challenging near-term macro outlook, especially in key verticals like Hi-Tech and Manufacturing (52% of 3Q revenues), we expect FY25 revenue growth to be 7.1%, before picking up in FY26. We factor in a modest USD revenue CAGR of 5.5% over FY23-26E.

Outlook

We remain on the sidelines for the stock, especially given the headwinds on growth. Considering near-term challenges in a significant portion of its portfolio and limited upside on margins, we see current valuations at 20xFY26E EPS as fair. Our TP of INR570 implies 20x FY26E EPS. Retain Neutral.

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