Elara Capital has a buy call on Zensar Technologies with a target price of Rs 280.The current market price of Zensar Technologies is Rs 230.35.Time period given by brokerage is one year when Zensar Technologies price can reach defined target.Investment rationale by brokeragePaying off: focus on three verticals and digital delivering growth- Zensar Technologies (ZENT IN) has second-highest revenue contribution from its digital practice (44.2 per cent) among mid-cap India IT Services firms (22.0-48.1 per cent range).
Under CEO Sandeep Kishore, who joined ZENT in January 2016, internal adoption of digital technology with investments in intellectual property that can be repurposed to create differentiated value proposition had been initial focus.
This has been followed by acquisitions to strengthen focus areas of digital and insurance verticals.
Sales organization reflects dual go-to-market strategy of both horizontal- and vertical-based sales similar to approach at Kishores former employer, HCL Technologies.Thinking differently: value addition from billing increase- Onsite revenue proportion declined by 210bp from 1QFY17 (first quarter after Kishore became CEO) to 2QFY19.
During same period, revenue per person improved by 8.0 per cent, resulting in highest revenue per employee (USD 57.6K/year) among peers.
While high revenue per employee also is partly due to highest onsite proportion among peers, we believe realization improvement despite offshore shift indicates successful repositioning of firm under new management similar to that at LT Infotech.Looking ahead: medium-term revenue growth prospects stronger- We expect a revenue CAGR of 36.3 per cent over FY18-21E despite a drag from third-party maintenance (TPM) service and management business, and Rest of World (earmarked for divesture) that have no room in new strategy.
TPM has been more or less flat at USD 7-8mn over 1QFY17-2QFY19.
The broad-based nature of growth across declared focus geographies of North America, Europe and Africa and across Top-5 Top 11-20 client buckets suggest new sales strategy is already delivering results.Valuation: Elara Capital initiates coverage on Zensar Technologies (ZENT IN) with a Buy rating and a 12-month forward target price of Rs 280 based on 15x FY20E P/E.
We see a long runway of growth with a focused sales strategy.
We expect an earnings CAGR of 36.3 per cent over FY18-21E on a revenue CAGR of 23.6 per cent and an EBITDA margin expansion of 452bp by FY21E as acquisitions continue to be used as tip-of-the-spear to get into new accounts and add vertical-specific capabilities, such as Guidewire implementation and support.
We expect gross margin to expand by 90bp in FY20E and by 100bp further over FY21E, with more solutions-based selling and operating leverage for current investments being made to enhance capability.