Zensar Technologies gaining back its lost momentum

The share price of Zensar Technologies opened 2.7 percent higher on February 22, a day after Nippon Life India Trustee bought an additional 1.75 percent stake in the company.

With this transaction, Nippon Life’s stake in the company has increased to 5.2 percent, up from 3.5 percent.

Zensar shares had lost 13 percent of its valuation in the last year. The stock has outperformed the market, rising 32 percent in the past month, compared to a 1.6 percent fall in the Sensex, with the share price jumping 17 percent in the last six trading sessions.

The recovery in the IT sector, in general along with decent quarterly performance seem to be boosting the stock.

Net profit jumps 35%

Despite weak revenue growth for the quarter, Zensar’s margins improved, and net profit jumped 35 percent QoQ to Rs 77 crore in Q3FY23. EBITDA increased 52 percent QoQ to Rs 85 crore, while EBITDA margin widened to 7.1 percent for the quarter, compared to 4.6 percent in Q2FY23.

According to Sachin Zute, CFO, Zensar, “Our disciplined programme for margin improvement through measures such as increasing fresher deployment, optimising operational metrics and rationalising costs have helped us in improving margins in Q3 in spite of it being a furlough quarter.”

“The company plans to improve margins to mid-teens (~15-16%) by Q2FY24E. Further, the new CEO has been instrumental in turning around a smaller size IT company CSS Corp,” as per IDBI Capital.

“We expect the new CEO to make a similar turnaround in Zensar. His current focus is on improving margins, followed by revenue growth. Hence, we have conservatively built in revenue and PAT CAGR of 9 percent and 37 percent over FY23E-FY25E, respectively”, it added.

The company recently appointed Manish Tandon as MD & CEO with effect from January 23, 2023.

“In the one month since joining Zensar, I have spent time understanding our fundamentals. With our strong investments in our service lines, our vertical capabilities, and our strong leadership, we are positioned well to drive sustainable and profitable growth,” he commented on Q3FY23 performance.

Segment-wise, BFSI witnessed a YoY growth of 19.8 percent while HiTech & Manufacturing and Consumer services reported contraction due to macro uncertainties.

According to brokerage firm HDFC Securities, “Zensar is poised well for registering revenue growth in the medium to long term.”

The brokerage believes Zensar Tech will deliver long-term sustainable growth, led by a healthy deal pipeline and strong execution. Zensar has grown organically and inorganically over the years.

The company expects EBITDA margin to stabilise in the mid-teens, and higher fresher intake and near-shore locations to reduce dependence on subcontractors and increase utilisation.

Driving deal momentum, annuity revenues, increasing investment in sales and talent, leadership and tuck-in acquisitions to build capability bode well for long-term revenue growth, it said.

IT sector on the mend

The IT sector’s signs of recovery, coupled with healthy Q3 performance, are pulling investors back into the sector.

According to ICICI Direct, “There are several demand indicators underscoring the strength of technology spend across clients even amidst the current macro slowdown, indicating that tech spending is poised to increase as a proportion of global GDP. Also, Indian IT players stand to gain market share amidst this macro slowdown due to clients’ high focus on cost optimisation and efficiency improvement (visible in the pick-up in contract activity during Q3FY23), over more discretionary spend on digital transformation.”

As per Bloomberg Data, Zensar has 10 buy, four hold and zero sell calls.

Brokerage firm Motilal Oswal also remains positive on the sector, led by sustained long-term demand. “We continue to prefer TCS, HCL Tech, and Infosys in the Tier-I IT space and Cyient, Zensar and L&T Technology Services, among Tier-II players,” the brokerage said.

At 12.47 pm, the stock was trading 0.53 percent down, at Rs 291.90 apiece.