Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs330

Q1FY2008 results: First-cut analysis

Result highlights

• Zensar Technologies has announced a 9.7% quarter-on-quarter and 36.4% year-on-year growth in its consolidated Q1FY2008 revenue to Rs187.9 crore. The same is slightly lower than our estimates.
• However, the performance was disappointing on the margin front. The operating profit margin (OPM) plummeted by over 450 basis points to 9.7% on a sequential basis. The gross profit margin (GPM) declined by around 300 basis points due to the negative impact of wage hikes and appreciation of the rupee. The sequential increase of 19.8% in the selling, general and administration expenses to Rs34.5 crore further added to the 150-basis-point decline in the margin at the operating level. We suspect that the company could have also been affected by a one-time item related to the integration of the recently acquired ThoughtDigital or the setting up of a development centre in Poland during the quarter. Consequently, the operating profit declined by 25.3% quarter on quarter (qoq) and 8.9% year on year (yoy) to Rs18.2 crore.
• In line with the operating profit, the consolidated earnings also declined by 22% qoq and 8.6% yoy to Rs13.4 crore, which is much lower than our expectations of Rs15.8 crore for the quarter.
• At the current market price the stock trades at 10.1x FY2008 and 7.8x FY2009 earning estimates. We maintain our Buy call on the stock and would come out with a detailed update after the investor conference call tomorrow.