HDFC Securities is bullish on Zensar Technologies has recommended buy rating on the stock with a target price of Rs 265 in its research report dated August 08, 2019.
HDFC Securities' research report on Zensar Technologies
Revenue stood at USD 153.3mn (+3.1% QoQ, +3.6% CC) vs. est. of USD 153.7mn led by growth in core business (96% of rev, +3.5% QoQ). Non-core (4% of rev) declined 5.4% QoQ led by MVS. Ramp-up of large deal wins is driving growth in the core business. Digital (49% of rev, +7.8/31.4% QoQ/YoY) is the key focus area. Zensar’s investment in its Return on Digital (RoD) platform is a key differentiator and is visible in improving win ratio (50%) in cloud deals. Hi-Tech (39%) and BFSI (24%) grew 5.5/11.0% QoQ. Retail (19%) was down 10.7% QoQ due to completion of large projects and delay in client decision making. Cynosure (Guidewire SI) is driving growth in Insurance. Focus on strategic account mining has led to healthy growth in Top-5/10 accounts, up 17.7/25.3% YoY. Adjusted core EBITDA margin stood at 13.3%, down 80bps QoQ led by lower utilisation, investments and currency. Target is to improve core EBITDA margins to ~15% through off-shoring, pyramid rationalization and lower sub-con expenses. 2QFY20 will have a full quarter impact of the wage hike.
We maintain BUY on Zensar post an in-line 1QFY20. Strong deal pipeline, ramp-up of large deals and improving win-ratio provides revenue visibility. Margins are not showing signs of improvement despite revenue up-tick. We cut multiple to 14x from 16x on slow margin recovery and rising on-site cost. Our TP of Rs 265 is based on 14x June-21E EPS.
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