Neutral Zensar; target of Rs 470: Motilal Oswal

Motilal Oswal's research report on Zensar

ZENT reported 1QFY24 revenue growth at 1.3% QoQ in constant currency (CC), in line with our estimate. Deal TCV rose 23% YoY to USD154m but fell 12% sequentially after a seasonal high in 4QFY23. ZENT again surprised on the margin front with a 420bp gain sequentially to 18.7% (est. 15.0%), as it trimmed employee and sales expenses despite revenue growth in 1Q. While revenue growth in 1Q was in line with our estimate, the management remains cautious about the near-term demand environment, citing challenges in verticals like H-Tech and Consumer and pressure on discretionary spending. ZENT management does not see the situation improving at least for the next two quarters. Given the challenging nearterm macro outlook, especially in key verticals like Hi-Tech, Manufacturing and Consumer (56% of 1QFY24 revenues), we expect FY24 revenue growth to remain muted (est. 2.5% YoY CC). Revenue growth should improve in FY25, as the expanded service portfolio starts delivering on growth. We factor in a modest USD revenue CAGR of 7.5% over FY23-25E.

Outlook

The stock has run up meaningfully (2.3x in last six months) on the back of margin improvement. Given near-term challenges in a significant portion of its portfolio and limited upside on margins, we see current valuations at 18xFY25E EPS fair. Our TP of INR470 implies 18x FY25E EPS. Retain Neutral.