Buy Zensar Technologies; target of Rs 445: HDFC Securities

HDFC Securities' research report on Zensar Technologies

Zensar reported a strong EBITDA margin expansion of ~324bps QoQ (substantial beat), while the revenue remained flat sequentially (+0.4% QoQ CC). The strong and sustainable margin improvement during the quarter was on account of lower sub-contracting, higher utilization, better productivity & business mix (lower passthrough) and FX. Margins are now expected to be in the range of mid-teens level, supported by continued gains in productivity—subcontracting expenses, pyramid rationalisation and utilisation improvement, going forward. We have factored in EBITDAM of 14.3/14.7% for FY24/25E respectively (at Q4FY23 levels). Softness in consumer services, banking and emerging verticals was offset by a recovery in insurance, hi-tech and manufacturing verticals. The management expects challenges in consumer and hi-tech verticals going ahead and cited the uncertainty in the current demand environment with delay in decision-making. While deal bookings provide growth visibility, we trim our revenue estimate by 2-3%, factoring challenges in hi-tech and consumer verticals; but increase EPS estimates by ~15% supported by a better operational trajectory for FY24/25E.

Outlook

We maintain our BUY rating with a TP of INR 445, based on 18x Mar-25E EPS. The stock trades at a P/E of 15.9/13.7x FY24/25E EPS, a discount of ~13% to 5Y average P/E multiple.