Buy Zensar at Rs 703.8 and add on dips to Rs 600 - Rs 635 for Target of Rs. 882 in 1-2 quarters :HDFC sec

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Company Background: Zensar Technologies Ltd. (ZTL) is a leading software and infrastructure services provider from India. The company has industry expertise that spans Manufacturing, Retail, Insurance, Healthcare, Utilities, and Banking Financial Services. An RPG Group company, ZTL has 8037 employees with sales and operations presence across US, UK, Europe, Middle East, South Africa, Singapore and Australia. The Company delivers comprehensive services for mission-critical applications, enterprise applications, business intelligence and analytics, CRM and Business Process Management. ZTL also provides innovative Infrastructure Management solutions that enable leading companies worldwide to optimize, secure, manage and support their mission-critical infrastructure. Using its multi-shore capabilities, ZTL combines expert consulting, integration and support services with world class customer service to help IT organizations reduce costs, increase efficiencies and manage risk better. The Company has developed tools and methodologies, including the proprietary Solution BluePrint (SBP), which enables its clients with innovative business solutions and a rapid ‘gotomarket’ capability. The Company supports Fortune 500 clients with software business solutions that help them compete in the digital economy. Q3FY15 Results Review (Consolidated)  USD revenues grew by a robust 8% Q-o-Q, partly aided by full quarter consolidation of Professional Access [PA] (compared to 1.5 month consolidation in Q2). Revenues from PA were at $12.7mn v/s $6.4mn in Q2. The growth was aided by completion of large projects. The product / license revenues rose more than doubled sequentially from $7mn in Q2 to $14.4mn in Q3 largely on account of seasonality, as clients try and spend their budgets. Excluding products & PA, organic services revenues de-grew by 5% Q-o-Q. IMS services revenues de-grew marginally on Q-o-Q basis. The fall in overall revenues was largely led by Application Management Services (AMS) business, partly impacted by furloughs. In INR terms, revenues grew by 21.2% Y-o-Y & 9.8% Q-o-Q.  EBITDA grew by 20.9% Y-o-Y & 6% Q-o-Q, while EBITDAM fell by 3 bps Y-o-Y & 52 bps Q-o-Q to 14.7%. Sequential margin fall was led by higher Purchase of traded goods / Change in Inventories (up 115.2%). However, lower growth in employee cost (up 4.8% Q-o-Q) & decline in the other expenses (down 1.4% Q-o-Q) restricted further margin contraction.  PAT grew by 37.1% Y-o-Y & 3.3% Q-o-Q. PAT margins improved by 112 bps Y-o-Y, while it declined by 60 bps Q-o-Q to 9.7%. Decline in the other income (down 31.4% Q-o-Q) and higher finance cost (up 20.3% Q-o-Q) impacted the margins.  EPS for the quarter stood at Rs. 15.8 vs. Rs. 11.6 in Q3FY14 and Rs. 15.3 in Q2FY15.

Key Highlights / Developments over the last one year: Acquisition of Professional Access – a strategic move In August 2014, ZTL acquired India-registered e-commerce company Professional Access Software Development Pvt. Ltd for an undisclosed amount. In addition, Zensar Technologies Inc., the US-based wholly-owned subsidiary of ZTL acquired 100% outstanding equity shares of Professional Access Ltd, a company registered in US. Both companies are engaged in the information technology business with specialization in the e-commerce domain. Professional Access (PA) is one of the leading Oracle ATG implementation specialists, focuses on Commerce Solutions, with the core technology used being Oracle Commerce Platform. The company has till now delivered 175+ implementations for Fortune 2000 brands. It has done maximum number of e-commerce implementation in US. The company employs ~800 people across the US and India with US operations in New York and India operations in Mumbai, Bangalore and Noida. The acquisition adds significantly to ZTL’s retail capabilities as~90% of PA’s revenues come from Retail and Telecom customers. The acquisition gives ZTL access to CIO level relationships in major retail logos. World-wide penetration of e-commerce is merely ~7.9%; however e-Commerce is growing at ~2x the growth rate for global retail sales. PA faces limited competition as there are only ~10 companies in ATG implementation space globally, including the likes of Accenture, Cognizant and EPAM. Other players are significantly smaller in size (100-500 employees). PA is the only Oracle Platinum partner in Advanced Oracle ATG implementation. Hence the acquisition increases ZTL’s penetration potential in Oracle. PA’s Oracle ATG capability will further strengthen Zensar’s positioning as one of the top Oracle players. It increases thrust on ZTL’s digital transformation initiatives with its clients through offering of e-Commerce solutions. The acquisition opens up cross-selling opportunities of Zensar services like Oracle EBS, Fusion Middleware into PA Clients and PA services to Zensar clients. Cross-selling to PA’s clients is made easier due to CIO / CMO level relationships of PA.

ZTL’s retail vertical is likely to double in size post this acquisition. ZTL is now one of the few companies in the world with end-to-end solutioning capabilities for implementation of omni-channel strategies on the Oracle platform PA’s revenues have grown by 27.5% on CAGR basis over FY12-14 with $38.2mn revenues in FY14. The closing order book stood at $29.1mn (76.1% of the total FY14 revenues). The management has guided for revenue run-rate of about $42-45mn for FY15. The consolidation of PA in ZTL would be for 7.5 months in FY15 (consolidated from w.e.f. from Mid-August). PA works with some of the top retailers in the world including Kohl’s, Sam’s Club, Wal-Mart, John Lewis partnership, Mr. Price in South Africa, Urban Outfitters and Walgreens and they currently have a pipeline of good business from some of the biggest retailers in the world, which is encouraging. Q3 was the first full quarter with PA for ZTL. It grew by a healthy 14.2% Q-o-Q revenue growth in USD terms and margins were very much in line with those in the Enterprise Applications business. Partnership with Agile Financial Technologies strengthens ZTL’s position in BFSI sector In Sept 2014, ZTL announced a strategic partnership with Agile Financial Technologies (Agile FT), a global leader in the BFSI software solutions space, to strengthen its position in the Banking, Financial Services and Insurance (BFSI) sector. This partnership would help ZTL and Agile FT optimize proficiency to meet the rapidly growing needs of the sector and continue to remain customer centric by providing them with the industry leading solutions and strong domain expertise. ZTL has a direct presence in Dubai and plans to have multiple centres across the region. This partnership is an important step towards re-emphasizing the significance that the Middle East market plays in ZTL’s growth strategy. Enterprise business witnessing stability, IM business recovering after an underperformance over last two years The Enterprise business has been stable quarter-on-quarter and continues to be on a high growth trajectory over the last 12 months, registering 14.6% year-on-year growth on a YTD basis and 13.1% Y-o-Y growth in Q3. The IM business which was underperforming over the next two years and was an area of concern, is seeing a recovery both in terms of revenue growth and profits. It has been stabilizing in terms of the services area over the last few quarters and the shift towards cloud, dual shore services has all been bearing good results. The services revenue has remained stable and the management expects the growth to continue over the next four to six quarters. Geographically, US to be a major growth driver; focus would also continue on Europe, Africa, Australia & Middle The management expects US to be a major revenue contributor going forward (~75%). Professional Access is very heavily focused on the US. As regards the other territories the company is completely defocusing Asia because it does not see enough margins happening in Singapore. However, it would continue to focus on Australia & Middle East. Besides that it would focus largely on Europe, in which Continental Europe would be a key area of focus. Further, given its focus on digital, there is lot of opportunity in Sweden, Finland and Denmark. Apart from US and Europe, the focus would also continue on Africa because of strong growth in South Africa. The company has recently opened its office in Kenya. India would also be a focus market, as with the Prime Minister’s digital India strategy, ZTL sees a fair amount of opportunity in digitization, digitalization and some large public sectors who are looking at significant implementations of large ERPs.

Betting Big on Digital space Over the next two to three years the management aims 20% revenue share from digital (current revenue share is expected to be 8-9%). It aims to grow digital and ecommerce business at 20% plus every year for the next three to four years. Given the healthy pipeline and the trends in the market place, it believes that such growth is possible. In the Digital space, ZTL has brought together product startups in India, evaluating their innovations, to further help take the shortlisted products global. These startups are in the new age technology areas of Social, Mobility, Analytics and Cloud. ZTL is also looking at In-sourcing services, which would enable the companies to set up their captive units in India or elsewhere. Will continue scouting for inorganic opportunity The company stated that it would continue to look at inorganic opportunity. It is looking at strengthening its SAP capabilities and is looking at companies in Germany because there is an opportunity to get good companies. Sometime next year, it could look at the opportunities in product engineering because embedded system, outsourced product development are all key areas of growth for ZTL. However, the company has ruled out any big bang acquisition in the next four to six quarters. Other highlights / Developments over the last one year:  The CAPEX for the quarter has been Rs. 39 mn and YTD CAPEX has been Rs. 180.7 mn. In terms of debtor days coverage ZTL is now at 72 days that is including Professional Access. Excluding Professional Access it is at 65 days cover. In terms of cash balance, as of 31st December, the cash balance stood at Rs. 2720 mn in cash plus short term investments. In terms of loans its debt position stood at Rs. 1830 mn or $29 mn (all in the US), out of which $12 mn is after the repayment of $6 mn of the debt that it had taken for PSI. Total free cash as of 31st December stood at Rs. 890 mn.  The overall headcount as on Dec 31, 2014 stood at 8,037 (up 2.4% Q-o-Q). The management stated that it would be hiring between 400 to 450 freshers, which will be 80% engineers and 20% non-engineers for next year. In addition to those 400-450, it will probably expect to hire another 200 in terms of lateral hiring, Hence the total net addition targeted over the next twelve months is 600-650 employees.  ZTL is currently looking at couple of consolidation deals in America which could be over $15-20 mn. The company sees enough opportunity for larger ticket size deals in the coming quarters (both in Infrastructure Management as well as in the Enterprise business), which could optimize its fixed cost and improve profitability.  As of December the order pipeline was just over $350 mn roughly $200 mn is in the Enterprise phase, $150 mn is in Infrastructure business and the PA pipeline itself is about $20-25 mn. The pipeline looks healthy with some of these deals both from existing and new clients being large deals.  For FY16, the company aims to grow by 15% in Constant Currency terms.  The company expects tax rate to be 30-31% for FY15 and 29-30% for FY16.  The company is comfortable with the current utilization levels of 78%, but would continue focusing on improving the utilization rate. Conclusion & Recommendation: Q3FY15 was a good quarter for ZTL, much better than the earlier quarters, especially with the turnaround in the IM business, the continuing growth in Professional Access and the healthy deal pipeline across all business segments. We expect this good performance to continue over the next few quarters. The management has indicated good traction in order booking & healthy deal pipeline. In Q2FY15, the pipeline stood at $410 mn of which 36-37% was for IMS. We expect further deal wins going forward, thus improving the revenue visibility and boosting revenue growth.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011776