Zensar Technologies (ZENTE)

CMP: | 229 Target: | 235 (2%) Target Period: 12 months HOLD

August 9, 2022

Macro concerns impacting some key verticals…

About the stock: Zensar Technologies (Zensar) offers application & IMS services to

Company Update
hi-tech, manufacturing, retail and BFSI. Particulars
P a rtic ula r Amount
 Zensar has grown organically and inorganically over the years
Market Cap (| Crore) 5,213
 Net debt free and healthy double digit return ratio (with RoCE of 19%) Total Debt (| Crore) -
Cash & Invets (| Crore) 1,020
EV (| Crore) 4,193
52 week H/L 587 / 222
Q1FY23 Results: Zensar reported weak numbers on the margin front. Equity capital (| Crore) 45
Face value |2
 Revenue grew 3.1% QoQ in CC terms while dollar revenue grew 1.7% QoQ
Shareholding pattern
 EBITDA margins declined ~290 bps QoQ to 11.3% Sep-21 Dec-21 Mar-22 Jun-22
 Digital revenues declined 0.5% QoQ. Promoter 49 49 49 49
FII 16 18 17 16
DII 21 14 13 14
Public 14 19 21 21
What should investors do? Zensar’s share price has grown by ~1.4x over the past Price Chart
five years (from ~| 158 in August 2017 to ~| 229 levels in August 2022).

 We change our rating on the stock from BUY to HOLD 20,000 700
600
16,000
500
Target Price and Valuation: We value Zensar at | 235 i.e. 14x P/E on FY24E. 12,000 400

ICICI Securities – Retail Equity Research

8,000 300
200
4,000 100
0 0

Nov-2019

Nov-2020
Jul-2019

Jul-2020

Jul-2021

Jun-2022
Mar-2020

Mar-2021

Oct-2021
Feb-2022
Key triggers for future price performance:
 Addressing supply side challenges, which are impacting its growth by Nifty (L.H.S) Price (R.H.S)

continuous compensation interventions

 Moderation of subcontractor costs, which is expected to be one of the Recent event & key risks
levers for margin expansion apart from pricing, utilisation improvement,
more offshoring, etc.  Macro concerns pushing
revenue recovery
 Expect revenue growth at CAGR of 7.8% over FY22-24E
 Key Risk: (i) Better than expected
performance from top verticals
(ii) Lower than expected margins
Alternate Stock Idea: Apart from Zensar, in our IT coverage we also like Persistent.
Research Analyst
 Key beneficiary of growth in digital technologies and exposure to growth
Sameer Pardikar
segments like healthcare & BFSI
[email protected]

 BUY with a target price of | 4,200

Key Financial Summary

5 Year CAGR 2 Year
(| Crore) FY20 FY21 FY22 FY23E FY24E
(FY17-22) CAGR (FY22-
Net Sales 4,182 3,781 4,244 6.8% 4,695 4,930 7.8%
EBITDA 507 685 657 11.2% 563 700 3.3%
EBITDA Margin (%) 12.1 18.1 15.5 12.0 14.2
Reported PAT 263 300 416 12.1% 272 381 -4.3%
EPS (|) 11.5 13.2 18.3 11.9 16.8
P/E 19.9 17.4 12.5 19.2 13.7
ROE (%) 12.6 12.8 15.5 9.4 12.1
s
ROCE (%) 12.5 18.9 15.5 11.7 14.6
Source: Company, ICICI Direct Research
 Company Update | Zensar Technologies ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

 The company reported revenue of US$155.9 mn, 1.7% QoQ dollar growth
while CC growth was 3.1% QoQ. In rupee terms, revenue grew 4.3% QoQ
to | 1,203.4 crore. Digital services revenue declined by 0.5% QoQ

 Geography wise, US region (70.9% of the mix) reported growth of 2.5%

QoQ while Africa region (11% of mix) rebounded & reported a strong growth
of 4.6%. Europe region (18.1% of the mix) declined 3.1% QoQ. The
company indicated that growth in the US was led by BFSI verticals while
Africa growth was led by new deals in BFSI, Cloud & Advanced engineering

 Vertical wise, in CC terms, banking, insurance, emerging & manufacturing

posted revenue growth of 10.6%, 5.6%, 5.1% & 3.3% QoQ, respectively,
while hi-tech & consumer services were laggard with growth of -0.8% & -
0.4%, respectively. The company indicated that the macroeconomic factors
impacted the revenue growth of hi-tech & consumer services verticals

 EBITDA margins for the quarter declined ~290 bps QoQ to 11.3%. The
company indicated that the margins declined due to the following factors:

i) Cost of Delivery: the company indicated that increased cost of

delivery impacted margins by ~250 bps. The company mentioned
that increased cost of delivery was due higher than attrition it is
witnessing both in offshore and onsite (that also reflects in higher
sub-contractor cost, which was up 12.5% QoQ and now forms
16.5% of revenues

ii) Lower utilisation: The company did hire 1300 freshers in FY23 and
hence utilisation was dropped impacting margins by ~100 bps

iii) Forex: The company indicated that due to currency depreciation

the margins of the company was impacted by 100 bps

 Zensar indicated that the demand scenario is expected to remain

challenging for the next three to four quarters, especially in hi-tech,
manufacturing and retail sectors (59% of mix) due to macro challenges
impacting this sectors. The company indicated that in these sectors clients
have reduced spending, in some cases in fact, clients have stopped tech
spends and also deferred some cases. They are not witnessing challenges
in other verticals as of now

 The company indicated that it has earlier guided for mid teen EBITDA
margins in Q4FY23 but is now pushing that margin target by two to three
quarters to Q3FY24. Zensar has rolled out annual wage hike effective from
July 2022 and expects similar margin impact, which was visible last year.
The company, however, mentioned that due to supply side challenges, the
hike given this year (i.e. July 2022) is much higher than last year

 The company indicated it is working on following margin levers, going

forward

i) Attrition: The company expects that due to record wage hikes and
time to time wage corrections, attrition will stabilise in few quarters

ii) Fresher hiring & utilisation: The company indicated that it had
started its fresher hiring program in FY22 and will continue the
same in FY23. Zensar hired ~1,300 freshers in FY22 & ~400
freshers in Q1FY23. The company indicated that they were late
entrant as far as fresher hiring program is concerned vs its peers.
Hence, top tier college graduates were not available when they
started with fresher hiring programs

iii) Sub-contractor cost: The company expects moderation in

subcontractor costs in a few quarters when it would replace them
with its own employees

ICICI Securities | Retail Research 2

 Company Update | Zensar Technologies ICICI Direct Research

iv) Price revision: The company indicated that it is in continuous

discussions with its clients for price hike due to elevated employee
cost pressures

v) Offshore mix: The company indicated that it continues to pursue

its strategy to push for more off shore business mix to improve its
margins

 The company reported TCV of US$125 mn for the quarter, down 24.5%
QoQ. Zensar added nine new logos in the quarter. The company indicated
that revenue from its top five/top 10 & top 20 clients reported muted growth
of 1.8%, nil & 0.4%, respectively

ICICI Securities | Retail Research 3

 Company Update | Zensar Technologies ICICI Direct Research

Exhibit 1: P&L
Q1FY23 Q1FY22 YoY (%) Q4FY22 QoQ (%) Comments
Revenue 1,203.4 936.8 28.5 1,153.8 4.3 3.1% QoQ in CC growth
Employee expense 883 611 44.5 806 9.6

Gross Margin 321 326 -1.7 348 -8.0

Gross margin (%) 26.6 34.8 -816 bps 30.2 -355 bps
other expense 184 153 20.3 184 0.2

EBITDA 136 173 -21.1 164 -17.1

EBITDA margin decline due to supply side pressure amid
EBITDA Margin (%) 11.3 18.4 -711 bps 14.2 -292 bps high attrition as well as sharp increase in subcontractor
costs
Depreciation & amortisation 49 43 15.0 48 1.9
EBIT 87 130 -33.0 116 -25.0
EBIT Margin (%) 7.2 13.9 -664 bps 10.1 -282 bps
Other income (less interest) 15 10 56.8 63 -76.5
PBT 102 140 -26.9 180 -43.2
Tax paid 27 37 -27.1 49 -45.0
PAT 75 103 -26.8 131 -42.5
es

Source: Company, ICICI Direct Research

Exhibit 2: Change in estimates

FY23E FY24E Comments
(| Crore) Old New % Change Old New % Change
factoring weakness in key sectors of Hi-Tech,
Revenue 4,977 4,695 -5.7 5,574 4,930 -11.5
Manufacturing, Retail sectors
EBITDA 771 563 -27.0 892 700 -21.5
Aligned as per management guidance of delay in
EBITDA Margin (%) 16 12.0 -350 bps 16.0 14.2 -180 bps
EBITDA margin goalpost by atleast 3 quarters
PAT 424 272 -35.8 521 381 -26.8
EPS (|) 19 11.9 -35.8 22.9 16.8 -26.8
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4

 Company Update | Zensar Technologies ICICI Direct Research

Key Metrics

Exhibit 3: US$ revenue with QoQ growth Exhibit 4: QoQ CC growth

180.0 15.0 14.0 12.3
160.0 11.6 12.0
140.0 10.0 10.0
5.8 8.0
120.0 3.7 4.1 4.8
5.0 6.0 4.7 4.2
100.0 1.8 3.1
0.6 4.0
80.0
-2.1 - 2.0
60.0 -0.7
-
40.0 -5.0 -2.0 -3.4
130.8

131.6

122.8

120.2

127.2

141.9

147.1

153.2

155.9
20.0 -1.5
-4.0
- -6.7 -10.0 -6.0 -3.7
-7.0
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23
Revenue (US$ mn) QoQ Growth (%) QoQ CC Growth (%)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 5: US revenue QoQ growth Exhibit 6: Europe revenue QoQ growth

120 15.0 35 15.0
11.9 11.6 9.9
100 10.0 30 8.4 10.0
6.7 6.0
4.4 3.4 25
80 2.5 5.0 5.0
6.1 4.6
20 0.1
60 -1.5 - -
-3.1
15
-3.1 -5.0
40 -5.0
10
-4.8
20 -10.0 5 -10.0
100

104

108

111

19

20

21

22

22

25

26

29

28
99

98

86

84

89

-11.8 -11.3
- -15.0 - -15.0
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

US Revenue (US$ mn) US QoQ Growth (%) Europe Revenue (US$ mn) Europe QoQ Growth (%)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 7: Hi-Tech revenue QoQ CC growth Exhibit 8: Manufacturing revenue QoQ CC growth
70.0 20.0 25.0 17.0 20.0
13.9
60.0 15.0 20.0 15.0
50.0 10.0
15.0 10.0
40.0 2.9 5.0 5.8
-0.4 -0.8 10.0 3.3 5.0
30.0 3.0 -
-5.3 -5.2 -0.9
20.0 -3.8 -5.0 5.0 -
16.2

15.8

15.1

14.9

17.2

18.1

17.3

20.2

20.6

-3.6 -3.8
- -2.1
10.0 -10.0
58.6

59.1

48.4

48.6

40.9

45.9

43.3

43.1

42.6

- -2.2 -5.0
-10.6
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

- -15.0
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Manufacturing Revenue (US$ mn)

Hi-Tech Revenue (US$ mn) Hi-Tech QoQ CC Growth (%) Manufacturing QoQ CC Growth (%)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5

 Company Update | Zensar Technologies ICICI Direct Research

Exhibit 9: Top 20 clients revenue QoQ growth Exhibit 10: TCV trend
10.0 8.4 250.0
8.0 7.0
5.3
6.0 200.0
4.0 2.7
2.0 0.4 0.4 150.0
-
-2.9
-2.0 -0.4 100.0
-4.0
-6.0 50.0

150.0

175.0

200.0

100.0

187.5

125.2

165.6

125.0
96.7
-8.0
-8.2
-10.0 -
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23
Top 20 Clients Revenue QoQ Growth (%) TCV (US$ mn)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 11: Digital revenue QoQ growth Exhibit 12: Sub-contractor cost trend
20.0 17.0 16.5
16.6 16.5
15.0 16.0 15.6
15.2 15.3
15.5
9.2 14.9
10.0 15.0
4.9 14.5 14.2
3.1 4.2
5.0 14.0
13.5 13.0
-0.5 12.8
- 13.0
-3.2 -0.6 12.3
-0.8 12.5
-5.0 12.0
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23
Digital revenue QoQ Growth (%) Sub-contractor cost as % of Revenue

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 13: Net employee addition trend Exhibit 14: Headcount mix trend
1,400 14.0 11.8 11.6
1,200 12.0 10.4 10.6
1,000 9.0 9.1 9.5
10.0 8.5 8.8 8.5 8.2
800 7.3 7.5
8.0 6.1 6.3 6.7
600 5.9 5.8
400 6.0
1,198
302

863
267

401

266

200 4.0
2.2

1.8

1.9

2.2

2.4
1.9

1.8

2.1

2.4

- 2.0
-200 -
-569

-413

-280

-400
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

-600
-800
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Technical Onsite headcount (in '000)

Technical Offshore headcount (in '000)
Net Employee Addition Total Headcount (in '000)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6

 Company Update | Zensar Technologies ICICI Direct Research

Exhibit 15: LTM attrition Exhibit 16: Utilisation

33.0 84.0 83.3 83.3
27.9 28.1
28.0 26.7 83.0
82.2
23.2 82.0 81.5
23.0
18.1 81.0 80.7
80.4
81.3
18.0
80.0
13.5 80.1
11.7 79.9
13.0 14.8 79.0
12.9
8.0 78.0
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23
LTM Attrition (in %) Utilization (in %)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 17: Offshore mix Exhibit 18: EBITDA margin trend

46.0 22.0
43.6 20.6
44.0 42.8 43.4
42.5 42.3 20.0 18.8 18.4
41.7 41.6
42.0 18.0 19.9
40.0 15.3
38.1 16.0
14.4 14.4 14.2
38.0
14.0
36.0 35.0
12.0 11.3
34.0
10.0
32.0
30.0 8.0
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23
Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Offshore Mix (in %) EBITDA Margin (in %)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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 Company Update | Zensar Technologies ICICI Direct Research

Financial summary

Exhibit 19: Profit and loss statement | crore Exhibit 20: Cash flow statement | crore
FY21 FY22 FY23E FY24E FY21 FY22 FY23E FY24E
Tota l R e v e nue s 3, 781 4, 244 4, 695 4, 930 P rof it bef ore Tax 482 574 380 523
Growth (%) -10 12 11 5 Depreciation 175 185 185 185
Employee Benefit Expense 2,515 2,921 3,404 3,476
Change in working capital 315 (243) 27 (36)
Other Expenses 582 666 728 754
Income Taxes Paid (140) (152) (103) (141)
EBITDA 685 657 563 700
Growth (%) 35.1 -4.1 -14.2 24.3
CF f rom operations 858 335 482 523
Depreciation 175 185 185 185
Other Income 25 138 42 47 Other Investments (547) 214 42 47

Interest 54 35 40 40 (Purchase)/Sale of Fixed Assets (39) (233) (61) (64)

PBT before Exceptional Items 482 574 380 523 CF f rom inv es ting Activ ities (528) (17) (19) (17)
Growth (%) 28.3 19.1 -33.7 37.4 Inc / (Dec) in Equity Capital 1 3 - -
Tax 126 153 103 141 Inc / (Dec) in sec.loan Funds (330) - - -
PAT before Exceptional Items 356 421 278 381
Dividend & Dividend tax (27) (88) (73) (103)
Minority interest 7 5 6 -
Interest Paid on Loans (4) (1) (40) (40)
P AT a f te r e x c e ptiona l ite ms 300 416 272 381
CF f rom Financial Activ ities (359) (86) (113) (143)
Growth (%) 13.9 38.7 -34.7 40.3
Net change in cash (29) 233 350 363
Diluted EPS 13.2 18.3 11.9 16.8
Opening cash 517 699 856 1,154
EPS (Growth %) 14.3 38.7 -34.7 40.3
Source: Company, ICICI Direct Research Clos ing cas h 699 856 1, 154 1, 468
Source: Company, ICICI Direct Research

Exhibit 21: Balance sheet | crore Exhibit 22: Key ratios | crore
FY21 FY22 FY23E FY24E FY21 FY22 FY23E FY24E

Equity 45 45 45 45 P e r s ha re da ta (|)

Reserves & Surplus 2,297 2,642 2,840 3,119 Diluted EPS 13.2 18.3 11.9 16.8
BV 102.9 118.0 126.8 139.0
Networth 2,342 2,687 2,885 3,164
DPS 3.6 4.9 3.2 4.5
Total debt - - - -
Cash Per Share 30.7 37.6 50.7 64.5
Minority Interest 29 - - -
Ope ra ting R a tios (%)
Other liabilities 324 354 354 354
EBITDA Margin 18.1 15.5 12.0 14.2
S ource of f unds 2, 695 3, 041 3, 240 3, 518
PAT Margin 7.9 9.8 5.8 7.7
Fixed assets 388 382 435 418
Debtor days 57 69 57 57
Intangible assets 168 180 54 (0) Creditor days 21 27 21 21
Goodwill 577 724 724 724 R e turn R a tios (%)
Non current investments 154 161 161 161 RoE 12.8 15.5 9.4 12.1
Other non current assets 154 162 170 177 RoCE 18.9 15.5 11.7 14.6
Current Investments 363 164 164 164 RoIC 31.2 23.3 19.7 27.3

Cash Balance 699 856 1,154 1,468 V a lua tion R a tios (x )

Inventories - - - - P/E 17.4 12.5 19.2 13.7

EV / EBITDA 6.0 6.4 6.9 5.1
Debtors 589 797 728 764
Market Cap / Sales 1.4 1.2 1.1 1.1
Other current assets 342 447 438 451
Price to Book Value 2.2 1.9 1.8 1.6
Trade payables 220 316 268 281
S olv e nc y R a tios
Other Current liabilities 518 514 519 528
Debt/Equity - - - -
Application of f unds 2, 695 3, 041 3, 240 3, 518
Debt / EBITDA - - - -
Source: Company, ICICI Direct Research
Current Ratio 1.3 1.5 1.5 1.5
Quick Ratio 1.3 1.5 1.5 1.5
Source: Company, ICICI Direct Research

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 Company Update | Zensar Technologies ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock
Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]

ICICI Securities | Retail Research 9

 Company Update | Zensar Technologies ICICI Direct Research

ANALYST CERTIFICATION
I/We, Sameer Pardikar, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or
securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report
have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

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