Neutral Zensar Technologies; target of Rs 390: Motilal Oswal

Motilal Oswal recommended Neutral rating on Zensar Technologies with a target price of Rs 390 in its research report dated June 15, 2023.

Broker Research

June 16, 2023 / 14:37 IST

Neutral

Motilal Oswal's research report on Zensar Technologies

The Zensar stock has witnessed a substantial surge (a 78% increase over the past six months v/s a 1.5% decline in NIFTY IT index), on the back of a new leadership (Manish Tandon was appointed as CEO in mid-December) and a sharp margin recovery over the last two quarters (up 600bp from a low of 8.5% in 2QFY23). Despite the increased optimism on medium-term growth, following the leadership change, the growth prospects for FY24 are limited due to the prevailing weak macro environment. Given the elevated sensitivity to macro headwinds in a large part of its industry mix (Retail, Hi-Tech, and manufacturing sectors contribute 56% of revenues), we expect Zensar to deliver a modest 3.4% YoY CC revenue growth in FY24. Moreover, with the management’s focus on growth investments and limited headroom on operating metrics (peak utilization, recordhigh offshoring, and low subcontracting expenses), the EBITDA margin is expected to stabilize. The stock is currently trading at 16x our FY25E EPS (in-line v/s its peers at 17x). The near-term catalysts are already priced into the stock, while the medium-term growth recovery (management’s aspiration to achieve top quartile growth within three years) remains a work in progress. Hence, we are downgrading the stock to “Neutral” from Buy.

Outlook

The stock is trading at 16x (one-year forward PE) v/s its peers at 17x (median one-year forward PE). We believe ZENT’s growth story is already factored into the price and it is trading at full valuation, leaving limited upside potential from its current level. Hence, we are downgrading the stock to “NEUTRAL” from Buy earlier.

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