Sharekhan Research is bullish on Zensar Technologies and has recommended buy rating on the stock with target price of Rs 484.

Key points

Strengthening its portfolio of service offerings:

Zensar Technologies (Zensar) has effectively utilised the inorganic route to gain the required critical mass in the fast growing enterprise solutions segment (through the acquisition of OBT Global and ThoughtDigital), to strengthen its footprint in under-penetrated geographies such as Japan (through joint venture with Eza, Japan), and to gain access to marquee clients.

Maintaining the growth momentum:

Zensar is well poised to report a healthy growth of over 40% in FY2008. It is witnessing a strong traction in its organic business and the incremental revenues of Rs 1.10 billion from the recent inorganic initiatives would only add to the overall growth momentum in its revenues. Consequently, even after factoring in the adverse impact of the rupee appreciation, the company is expected to achieve its stated revenue guidance of Rs 8.50 billion in FY2008.

Margins are sustainable:

Zensar is also expected to buck the general declining trend in margins in FY2008. That's because some of its relatively new businesses of ITS and BPO that have been in the investment mode are expected to show a substantial improvement in their margins. It also has other margin levers like a favourable revenue mix and lower overhead costs to cushion against the adverse impact of wage hikes, the appreciation in the rupee and the consolidation of the relatively lower-margin revenues of ThoughtDigital.

Concerns

Possible downgrade in earnings guidance Given the continued steep appreciation in the rupee, the company might not be able to achieve its earnings guidance of Rs 850 million in FY2008. We

have factored in flat OPM and marginal decline in the net margins to reflect the impact of the increase in the interest outgo (a debt of USD 15 million for the acquisition of ThoughtDigital) and a higher effective tax rate in FY2008. Despite the possible downgrade (which is already factored in our estimates), the earnings are estimated to grow at a healthy rate of 36.4% in FY2008 and at a CAGR of 32.5% over the two year period FY2007-09. Lacks consistency in its quarterly performance Zensar has shown a healthy growth in its quarterly revenues and earnings which have grown at a compounded quarterly growth rate of 8.8% and 23.5% respectively over the past

seven quarters. However, it has shown a negative sequential growth in revenues and earnings in two of the seven quarters. This clearly reflects the lack of consistency in its quarterly performance that could limit the re-rating of the stock.

Valuation

Despite the concerns related to the appreciation of the rupee, Zensar's consolidated revenues and earnings are estimated to grow at a CAGR of 31.1% and 33.1% respectively over the two-year period FY2007-09. The higher than average industry performance over a sustained period of time is likely to result in the re-rating of the stock. Even at the current price the stock is trading at attractive valuations of 10.5x FY2008 and 8.1x FY2009 estimated earnings. This is a fairly large discount to the other comparable mid-sized companies. We recommend a Buy on the stock with a price target of Rs 484 (11.5x FY2009 estimated earnings).

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