>ZENSAR TECHNOLOGIES LIMITED: Akibia - Consolidated efforts yielding results

■ We interacted with the management of Zensar recently. The meeting reinforces our optimism on the long term prospects of the company.
■ The management has not seen any cause of concern within its top clients, as yet.
■ Cisco, which has been facing scale up issues over the past three quarters, is expected to see higher revenue growth, going ahead.
■ According to the management, Zensar is expected to get additional revenues as one of the large Indian vendors has been rationalized by Cisco.
■ Post the acquisition of Akibia, Zensar is in a position to cross sell services to the mutually exclusive set of clients and this is expected to help growth rates. Order booking for combined services is at about $12mn
currently, we understand.
■ Rationalization of low-margin business, focus on utilization and cost optimisation should sustain margins in FY13, we opine.
■ The management detailed the four focus areas to take the revenues to an aspirational level of $1bn by FY16.
■ We maintain our FY12E and FY13E earnings estimates at Rs.38.3 and Rs.40.7, respectively.
■ The stock is available at 4.4x FY13E earnings. We maintain BUY, with a DCF-based price target of Rs.220.
■ A delayed recovery in major user economies and a sharper-than-expected appreciation in rupee v/s major currencies are the risks for a relatively small player like Zensar.


We met up with the management of Zensar recently. Following are the takeaways


No concerns at micro level; Cisco to scale up 


■ While accepting that, the macro scene is still uncertain, the management has indicated that, it has not seen any major changes at the micro levels, which may cause concern.
■ The company has not seen any major delays in project ramp-ups or start of new projects - discretionary or non-discretionary.
■ A survey of the top clients in 3QFY12 had indicated a 10% - 15% increase in budgets for 3 out of the Top 5 clients. Cisco's budget is expected to rise by about 5-7% for CY12.
■ The top clients of the company continue to scale up business along expected lines.
■ Cisco, the largest client for Zensar, is also expected to start scaling up revenue from the current quarter.
■ We note that, Cisco revenues had not scaled up over the past three quarters because of internal restructuring within the client.
■ Zensar is also likely to benefit from the recent vendor rationalization exercise conducted by Cisco.
■ According to the management, Cisco has rationalised its vendor base to cut costs
(Zensar, TCS, Wipro and Accenture were the vendors).
■ In this process, Cisco has discontinued work with one of the large Indian vendors and Zensar is expected to benefit in terms of additional revenues.
■ We note that, post Akibia's acquisition, Cisco's contribution to Zensar's revenues has fallen from the higher levels of about 34% to less than 20%. This was one of the factors limiting additional business from Cisco.
■ The management is confident of strong growth from Cisco going ahead because of cost pressures on Cisco.
■ We view this potential scale up positively as it will provide support to the overall revenue growth of the company.
■ Zensar has benefitted due to vendor consolidation by 2 of the Top 10 clients.
■ The management maintains that, it has and will further rationalize some of the accounts which are yielding low margins. This is with a view to re-align the work force to better yielding projects. Thus, revenue growth may be impacted in the short term by this initiative.


Akibia - Consolidated efforts yielding results
■ The consolidated service offerings along with Akibia are getting increased acceptance from the company's clients.
■ About 14 clients are getting services jointly. The management has also indicated that, the order book for consolidated service offerings is currently at $12mn, with more in the pipeline.


Future focus areas
■ The management has detailed the four focus areas, which are expected to take Zensar to an aspirational revenue level of $1bn by FY16.
■ These are : IM, BFSI, Healthcare and Manufacturing/Retail/ Distribution.
■ IM currently brings in about 35% of the total revenues and Zensar plans to grow this into a $400mn revenue business by FY16.
■ Zensar will target to grow its existing US relationships while growing the RIMS business in European countries like UK, Germany and Benelux.
■ It has also decided to penetrate the Cloud, Social Media and Mobility (CLOSOMO) markets.
■ In IM, the company has already won $10mn worth of orders through the joint value proposition (Zensar and Akibia).
■ In Cloud, the partnership with Google has already brought in 2-3 clients and Zensar will be providing cloud platforms to them.
■ BFSI currently brings in 15% of revenues and the target is to get about $200mn revenues by FY16.
■ The focus of Zensar will be more on Insurance, we believe, where it will likely use more platform based services.
■ The company enjoys strong relationship with its clients that include UBS, Credit Suisse, Investec, Nomura etc. On the other hand, Akibia has some marquee customers like Federal Reserve Bank, JP Morgan chase etc.
■ Company plans to cross sell some of its own and Akibia products across globe. This is also expected to increase the client mining - for instance Nomura is


Zensar's client in Asia Pacific and Akibia's client in USA.
■ Manufacturing/Retail/Distribution (MRD) currently brings in 50% of revenues and is targeted to grow to $300mn by FY16.
■ Currently 25% of the company's revenues and nearly 50% of the MRD revenues come from the hi-tech companies.
■ Zensar is looking at SMEs as an area of growth and will target these through solutions and platforms.
■ Within retail, the focus will be on sub-segments like apparel retail and e-tailing. The oracle and SAP expertise will lead to new customer engagements, we believe.
■ Healthcare is a relatively new vertical for Zensar. It is currently focused on the ICD-10 business and has an order book of about $8mn in ICD.


Financial prospects
■ We maintain our FY12E and FY13E earnings. We assume the rupee to average 49 / USD in FY13.
■ Revenues are expected to rise by 55% in FY12 (Akibia consolidation WEF 4QFY11) and by 14% in FY13.
■ Margins are expected to remain largely stable in FY13 as the salary increments set-off the benefits coming from cost optimization, rupee depreciation and better utilization rates.
■ We have assumed tax at lower levels of 30% in FY13 because of the expected increase in revenues from SEZs.
■ Consequently, PAT is expected to rise by about 6% to Rs.1.76bn, leading to an EPS of Rs.41 in FY13E.


Valuations: We maintain BUY on Zensar Technologies with a price target of Rs.220
■ We have done our DCF analysis wherein we have also incorporated a WACC of about 15% to compensate for the higher risks.
■ Our price target is Rs.220 for the stock, based on FY13E earnings.
■ Sustained rise in margins and stable revenue growth profile may lead us to accord higher valuations to the stock.


Concerns
■ A sharp appreciation in rupee from the current levels may impact our earnings estimates for the company.
■ A delayed recovery in major global economies could impact revenue growth of Zensar.

RISH TRADER