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Motilal Oswal Report
The Zensar Technologies Ltd.'s stock has witnessed a substantial surge (a 78% increase over the past six months versus a 1.5% decline in NIFTY IT index), on the back of a new leadership (Manish Tandon was appointed as Chief Executive Officer in mid-December) and a sharp margin recovery over the last two quarters (up 600 basis points from a low of 8.5% in Q2 FY23).
Despite the increased optimism on medium-term growth, following the leadership change, the growth prospects for FY24 are limited due to the prevailing weak macro environment.
Given the elevated sensitivity to macro headwinds in a large part of its industry mix (retail, hi-tech, and manufacturing sectors contribute 56% of revenues), we expect Zensar to deliver a modest 3.4% YoY constant currency revenue growth in FY24.
Moreover, with the management's focus on growth investments and limited headroom on operating metrics (peak utilisation, record high offshoring, and low sub-contracting expenses), the Ebitda margin is expected to stabilise.
The stock is currently trading at 16 times our FY25E earnings per share (in-line versus its peers at 17 times). The near-term catalysts are already priced into the stock, while the medium-term growth recovery (management's aspiration to achieve top quartile growth within three years) remains a work in progress. Hence, we are downgrading the stock to 'Neutral' from 'Buy'.
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