Buy This Small-Cap IT Software Stock For Robust 45% Potential Upside: Chola Wealth Direct

Stock Outlook

The current market price of the Zensar Technologies stock is Rs 241.70 apiece. On 17 August, stocks fell 0.53%. The 52-week low of the stock is Rs 221.75 per share and 52 week high is Rs 587 per share. 

Returns on Investment

The share price of the company in the past one week has gained nearly 3.05%, whereas, in the past 1 month, fallen around 3.26%. However, in the last 3 months and 1 year, the share price slid down 20.28% and 47.08%, respectively. Over the past 3 and 5 years, the shares surged 12.39% and 51.93%, respectively. Its Return on investment is good over the last 5 years good compared to recent. 

 

1QFY23 Results

Zensar Tech. reported a strong revenue of US$155.9mn in 1QFY23 (+28.6%YoY/+1.7%QoQ)led by solid performance in BFSI & manufacturing verticals. The revenue growth on CC term stands at 3.1% QoQ. However, the EBITDA margin plunged to 11.3%, a -710bpsYoY/-290bpsQoQ decrease. The 2.5% impact of higher delivery costs (increase in sub-contractor costs),&1% impact of decreased volume & utilisation, both had a negative impact on EBITDA margin. These were partially offset by lower SG&A costs. Resultantly, PAT came at Rs 751mn(-26.5%YoY/-42.6% QoQ). 

Revenue Growth

Banking, insurance boosted the overall revenue growth of with a respective growth of 10.6%, 5.6%. The manufacturing vertical posted 3.3% QoQ during the quarter. The hi-tech & consumer services lagged with de-growth of 0.8% & 0.3%, respectively. Demand is strong in Europe and South Africa for BFSI. Spending on discretionary items is declining in the consumer services sector and might remain under stress for next few quarters. Geographically, North America (which generated 70% of sales) shown a great recovery with a 2.5%QoQgrowthrate, Europe(11% of sales) also demonstrated a strong increase of 3.5% QoQ, and the Africa area (11%ofsales) demonstrated a significant rise of 6% QoQ. 

The company reported net cash of Rs 163.5mn

The management of Zensar is anticipating strong demand supported by higher deal successes worldwide. The pace of hiring remained slow during 1QFY23, with the net loss of 280 employees keeping the total staff headcount at 11,559. Due to greater industry-wide demand and supply-side constraints, attrition rates remained high at 28.1%. The company reported net cash of Rs 163.5mn. Zensar's strategic focus on strengthening its cash management position has shown notable results. Its current excellent cash position is its best one ever. 

Strategic Growth Opportunities (SGOs)

In addition to core services, Zensar continues to develop capability and scale in targeted strategic growth opportunities (SGOs) like experience services, advanced engineering, and data analytics. Deal wins totalled $125mn for the quarter, down 24.5%QoQ but up 29.3%YoY. This was less than the quarterly run-rate average of $143mn. Due to improved deal pipeline and execution techniques, Zensar management anticipates reporting strong revenue growth momentum in the following three to seven quarters. 

EBITDA margins

The management had previously guided for mid-teen EBITDA margins in 4QFY23 but is now delaying that margin target by two to three quarters to 3QFY24. With yearly pay increases beginning in July 2022, Zensar anticipates a margin hit like that was observedin2021.The company did note that the increase given this year (i.e., July 2022) is significantly more than it was last year due to supply-side issues.

Buy for a target price of Rs 350

Zensar is expected to continue its strong topline performance on account of robust deal pipeline, diversified business mix. However, the current margin underperformance is alarming and thus compel to lower the margin estimates. Furthermore, the wage hikes anticipated in 2QFY23isexpectedtoexert additional toll on the margins. Moreover, the management has indicated muted performance to continue under some of its business verticals. Thus, we revise our target price to Rs 350.

According to the brokerage firm, the key risks to their buy call would be: 1) Margins remaining weak for forceable future and 2) increased attrition rate.

About - Zensar Technologies Ltd

Zensar is a leading digital solutions and technology services company that specialises in partnering with global organizations across industries on their Digital Transformation journey. A technology partner of choice, backed by strong track-record of innovation; credible investment in Digital solutions; assertion of commitment to client's success, Zensar's comprehensive range of digital and technology services and solutions enable its customers to achieve new thresholds of business performance. Zensar, with its experience in delivering excellence and superior client satisfaction through myriad technology solutions, is uniquely positioned to help them surpass challenges around running their existing business most efficiently, helping in their legacy transformation, and planning for business expansion and growth through innovative and digital ways.