Recommendation: Hold
CMP = Rs 188 (as of Tuesday)
CMP = Rs 188 (as of Tuesday)
Price target: Rs 380
Result highlights:
- Zensar Technologies (Zensar) reported a disappointing growth of 2.1% quarter on quarter (qoq) and of 29% year on year (yoy) in its consolidated revenues to Rs 191.8 crore during the second quarter ended September 2007. The sequential growth in its revenues was lower than expectations and driven by a volume growth of around 4% on a sequential basis.
- However, the operating profit margin (OPM) improved by 79 basis points to 10.5%, which is ahead of our expectations. That's because the annual salary hikes given in Q2 had an adverse impact of 230 basis points (or Rs4.5 crore) on the margin. This was more than mitigated by the leverage in the overheads cost.
- The earnings grew at a relatively higher rate of 5.4% qoq (17% yoy) to Rs 14.2 crore, which is again lower than our expectations of Rs 15 crore.
- The company has guided for revenues of Rs 800 crore and earnings of Rs70 crore (down from Rs80 crore given earlier) in FY2008. Even the downgraded earnings guidance implies a sequential growth of around 30% compounded quarterly growth rate (CQGR) over the next two quarters.
- However, the management is confident of achieving the same on the back of a considerable growth in volumes (the company signed some significant contracts recently; it expects a smart uptick in the enterprise application services [EAS] segment due to a revival in the performance of ThoughtDigital) and margin expansion (driven by a rate hike of 4-6% from some of its top accounts, leverage in the overheads cost and operational efficiencies).
- At the current market price the stock trades at 6.7x FY2008 and 5.6x FY2009 earnings estimates. Though the valuations are compelling, I still maintain Hold recommendation on the stock and would review recommendation based on the performance in the coming quarters.
