Zensar Technologies :FOCUS ON HIGH GROWTH IN IMS: IFCI research

IMS focused company strengthened by Akibia acquisition
Akibia is a US based IMS company, which was acquired by Zensar Tech in FY11. The IMS segment has outperformed all the other service lines and this is expected to continue, led by strong demand. It contributes 38% to the revenues for Zensar. The management has also taken active efforts to improve the PBT margin of Akibia to 14%, which will drive profitability in FY14.

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Growth to be driven by strategic verticals
Zensar offers a wide variety of services to key verticals like insurance, manufacturing and retail, which are expected to be the growth drivers going forward in the medium term. The BFSI vertical contributes 20% to revenues and has grown at a CAGR of 34% (FY09-12). Retail and manufacturing contributes 50% of revenues and has grown at a CAGR of 20% (FY09-12).
Strong client base – reduced dependence on Cisco
Zensar has developed a strategy to diversify its exposure to various top 10 clients because of which revenue contribution from its top client ie Cisco has come down to 22% currently from 36% in FY11. The top 5 and top 10 clients contribute 34% and 40% of revenues today respectively. Zensar has key marquee clients spread across various verticals and geographies, thus helping the company targeting growth with a better risk profile than in the past.
Strong guidance for FY13
Zensar has guided for a strong growth in USD revenues in the range of 15-18%YoY for FY13, on an organic basis. USD revenues have grown at a CAGR of 23% (FY09-12). The company also expects to achieve the revenue target of USD 1bn by FY16 and has laid a strategy for that. It also plans to acquire companies in SAP and IMS space to drive inorganic growth.
Valuation
We initiate coverage on the stock with a BUY recommendation and a target price of Rs 304 based on 6x FY14E earnings.


Valuation
Zensar Tech has reported a robust USD revenue growth of 46%YoY in FY12. Revenues have grown at a strong CAGR of 22%(FY09-12), outperforming most of the mid-tier IT companies. Zensar Tech has pursued a sound inorganic strategy in acquiring Akibia, which caters to IMS vertical, and this led the growth in FY12. EBITDA margin for Zensar Tech prior to the acquisition of Akibia was 15%, which dipped to 12-14% post acquisition, as Akibia is an onsite heavy business. Zensar has taken active steps to improve PBT margins of Akbiia from 5.5% in FY11 to 8% currently. We believe higher margins for Akiabia will also drive EBIDTA margins for Zensar Tech and bring it back to the pre Akibia acquisition levels of 15%. EPS CAGR for Zensar Tech has grown 22%(FY09-12) backed by strong topline growth. The average PER for Zensar has been extremely low at 3.1x (FY09-13).
Zensar currently trades at 5.6x and 4.5x based on our FY13E and FY14E earnings respectively. We intiate coverage with a BUY recommendation and target price of Rs 304 based on 6x FY14E earnings.