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  • 1. C O M P A N Y R E P O R T India 23 Aug 2011 Zensar Technologies Rs 127 Sec tor : IT Strong financials, robust bu siness mix xxxo...BSE Sensex 16,498 Zensar ended FY11 strongly positioned for growth. The acquisition of Akibia inNifty 4949 November 2010 makes Zensar among the leaders in infrastructure management52 week high (Rs) 193 amongst IT midcaps. Zensar has also reorganised its business along focus verticals,52 week low (Rs) 125 which will allow it to cross-sell its service capabilities and mine clients better. We believe Zensar now has a robust business model. Besides, it has a better financial record than most IT midcaps, including some fancied more by the market. It has stronger margins, better capital efficiency, and makes free cash flows more regularlyBloomberg ZENT.IN than most IT midcaps.NSE Code ZENSARTECH We believe Zensar can rerate toward higher end of peer group valuations, offeringBSE Code 504067 strong returns over a two year period.Equity Shares 43.37(m) A free cash flow generating companyFace Value 10(Rs) Zensar generated free cash of over Rs 2 bn over FY8-10. This allowed it do its largestMarket Cap 5,474 acquisition yet, a $66mn (around Rs 3 bn) all cash deal to acquire an IM company in(Rs mn) FY11. With robust operating cash flow going forward, Zensar will have ammo for further strategic acquisitions over FY11-13. Share Price Performance (%) Growth better than peer averages Zensar Sensex Zensar holds its ground against peers in growth rates delivered in revenues, EBITDA1 week -6.61 -1.39 and net profit over FY08-11. Its revenues grew 12% over FY08-11, compared to a1 month -13.63 -11.88 peer average of 7.4%. PAT has grown at 25% versus 17% for peers.3 month -27.32 -8.31 Growth drivers in place for FY11-136 month -22.81 -9.241 year -26.23 -10.38 Zensar made a significant acquisition in FY11, that of Akibia, an IM company. This will add over Rs 3.5 bn to the FY12 topline. More importantly, there is strong opportunity to cross-sell between existing Akibia and Zensar clients. Zensar is also Shareholding Pattern (Jun’11)% creating focussed verticals, a move which will help it mine its clients better, andPromoters 47.79 compete better against peers.FIIs 8.02 At current price, Zensar quotes at 4.2x FY11 and around 2.8x FY13e earnings,DII 2.52 below midcap averages. We rate Zensar at 5.2x expected FY13 earnings, giving aBodies Corporates 2.46 likely price of Rs 230 by March 2013. This implies a return of 80% absolute, orOthers 41.68 about 50% annualised upside from current levels. Dividend yield is 2.8% on FY11 DPS (despite a 1:1 bonus in FY11); this could rise to 4% by FY13. FY09 FY10 FY11 FY12E FY13E Sales 9,222 9,610 11,383 15,607 17,820 EBITDA 1,259 1,700 1,550 1,889 2,592 PAT 866 1,273 1,317 1,363 1914 EBITDA margin (%) 14 18 14 12 15 Net margin (%) 10 13 12 9 11 ROE (%) 32 43 34 27 28 ROCE (%) 30 41 24 20 25 P/E Ratio (x) 2.1 4.6 4.2 4.0 2.9 EV/EBITDA (x) 1.4 2.9 4.6 3.8 2.8 Dividend Yield (%) 2.8 3.6 4.1 Rs mn
  • 2. Company Report: Zensar Technologies 23 Aug’11 Investment Rationale Came out of FY11 positioned for growth Akibia acquisition a strong growth driver Zensar’s acquisition strategy is focussed on plugging gaps in its service offerings, designed to give global heft to critical parts of its business. For example, the Thought Digital acquisition catapulted Zensar among the top Oracle shops in India, and added considerable gap over its midcap peers.Akibia a The Akibia deal is a similar transformatory acquisition, positioning Zensartransformatory strongly in the infrastructure management (IM) space. Akibia had a topline ofdeal $108mn at the time of its acquisition, around 40% of Zensar’s FY11 turnover. With this, Zensar is now amongst top ten players in IM space in India. Akibia revenues reflected only in Q4 of FY11, so there will be significant topline impact in FY12. Akibia will add over Rs 3.5 bn to FY12 topline, playing a key role in projected 43% revenue growth for FY12.IM is among the More importantly, Akibia has strong pedigree in the IM space, which is one offastest growing IT the fastest growing IT segments. This can lift overall growth rates for Zensar.segment Also, Akibia presents significant cross sell opportunities. Several verticals within Zensar see opportunity for increment growth coming from cross selling opportunities. The cross sell opportunity could an incremental 5-10% growth to Zensar over next couple of years. Verticalisation will help in better client relationships The other significant change at Zensar is creation of a few focussed verticals, and stated organisation drive to run the business around vertical-driven sales process. Done well, this may have significant benefits. It will allow Zensar to mine its own client base better. For example, earlier an insurance sales lead may notVerticalisation will have had incentive to push say an IM solution. Now, with a top-downallow better client approach to serving clients, the mantra would be to provide holistic solutions,mining incorporating various parts of the service offerings. Verticalisation will also allow better solution selling abilities. IT clients have now matured, they now want IT companies which can talk business rather than mere coding. With clients now beginning to expect and appreciate higher level sales, this is a move in the right direction. Large IT has already begun to move to verticalisation, we believe midcap IT companies which are fast off the block on this trend will gain as well.Four-S Research 2
  • 3. Company Report: Zensar Technologies 23 Aug’11 Market ignoring strengths in the businessNot a me-me-too in Zensar’s valuations seem to suggest that the market thinks its businesseverything it does portfolio is inferior to most IT midcaps. The market seems to be unwilling to give value to several strengths Zensar has built in recent years. Oracle PracticeAmong the leading Zensar is among the key players in India in Oracle delivery. It has more thanOracle shops in 1,200 associates dedicated to this practice.India, ahead of Having executed over 500 projects, Zensars expertise extends over Oracle E-midcap peers Business Suite, Business Intelligence, Hyperion, Demantra, Oracle Fusion Middleware, Databases, Shared Services and Oracle Retail. It is a Platinum partner of Oracle. Only Infosys is a Diamond partner, a higher category. In the Oracle practice, Zensar is at par or better than any other midcap IT company, and even capable of competing with the IT majors in some cases IM PracticeAkibia puts Zensar The Akibia acquisition was meant to be transformatory for Zensar’s IMamong the best IM practice. With this acquisition, Zensar would count as among the leaders inshops the IM space amongst midcap IT. Ability to handle large clientsZensar has A large customer relationship is both a positive and a risk. The positive partsuccessfully is certainly the demonstrated ability to deal with a large relationship. Cisco ishandled Cisco a more than $100mn account for Zensar. While in the last few months therelationship size of business from Cisco has dipped, as Cisco is going through an internal restructuring, Zensar’s ability to deliver here is certain a positive stamp for the company. Zensar now has another large relationship with Assurant, an insurance client. Strong on processWorld class Zensar is the worlds first enterprise-wide SEI CMM Level 5 Company. Thisprocesses shows the company’s focus on rigorous processes. Some of that is also visible in its financial processes, discussed below. Better quality of financials Zensar has done much better in cash flows compared to peers We believe if the market is hugely concerned about viability and growth potential of the midcap IT segment, the first thing investors should check is the cash flow statement. If investors gave due attention to the cash flows, we believe some of the company valuations would look different from what they are now.Four-S Research 3
  • 4. Company Report: Zensar Technologies 23 Aug’11 Free Cash Generation at mid-cap IT companies FY08-10 FY08-11 1 3i Info -9,914 -8,445 2 Geometric 525 715 3 Infinite 600 637 4 Infotech Ent 580 -260Zensar has among 5 KPIT 911 549the better cash flow 6 Mastek* 1,294 1,379performances 7 Mind Tree 1,939 1,532amongst midcaps 8 NIIT Tech 1,536 1,697 9 Polaris 4,715 4,777 10 Rolta* -7,495 -10,093 11 Sonata 885 1,873 12 Subex -222 270 Industry Average -387 -447 13 Zensar 1,853 -69 Rank 3 9 (Rs mn) *Year ending JuneFancied midcaps Some mid-cap IT companies which are relatively more fancied than Zensar,like Rolta, Infotech like Rolta, Infotech Enterprises, and 3i Infotech, are running on inferior freehave poor cash cash flows. This means they are still buyers of growth. 3i has done dozens offlow focus acquisitions, Rolta seems to run a huge capex. What the table above tells us is that unless Zensar does a sizeable acquisition (which it did in FY11) it will generate free cash. Judicious use of cash flow important for driving growthCash flows-M&A We believe this is a strategy which can lead to sustainable growth – generatean important free cash, do a focussed acquisition to plug portfolio gaps and enhancegrowth strategy growth rates. The trick here is to maintain a tight leash on operating cash flows, and do acquisitions judiciously.Four-S Research 4
  • 5. Company Report: Zensar Technologies 23 Aug’11Some peers have Simple as it sounds, this is not something all that easy to implement, if youfrittered cash away look at the peer group. Both 3i Infotech and Rolta generate large amounts of operating cash, yet they run hugely negative free cash. In 3i’s cash, it is both aggressive fixed asset purchase and acquisitions. In Rolta, it is mainly fixed assets which more than eat up the cash flow. In 3i’s case, we believe there is lack of discipline in acquisitions, in the other case, you have to question the need to massive investments in fixed assets. Take another case, Infotech Enterprises, which has a market cap of more than 2x Zensar. It has generated just marginally better operating cash flow as Zensar over the last 5 years. In 3 of these 5 years, Zensar has done better. Infotech again has invested 50% more in fixed assets compared to Zensar. In sum, we believe Zensar is doing far better than peers in both free cash flow generation, and end use of cash flows. Better working capital management The chart below shows debtor turnover for the latest financial year. As can be seen, Zensar is comfortably above peer average, and behind only two of the peers on this parameter. Companies like 3i and Rolta, which don’t seem to value free cash flows, are among the lower ones on this parameter. Debtor Turnover (x) 10.0 9.0Zensar has 8.0 7.0superior debtor 6.0collections 5.0 4.0 3.0 2.0 1.0 0.0 Infotech Ent Zensa r Infinite Mastek Subex Geometric Sonata Ind Avera ge 3i Info Pola ris KPIT Rolta NIIT Tech Mind Tree Better receivables management is one reason for the healthy operating cash flows at Zensar. Better capital efficiency That Zensar is running an efficient operation is clearly visible from the ROCE chart below. Zensar has returned an ROCE of above 25% for 6 of the last 8 years. Other than Infinite and NIIT Tech, Zensar is above all peers on this count.Four-S Research 5
  • 6. Company Report: Zensar Technologies 23 Aug’11 ROCE (%) 45.0 40.0 35.0Zensar scores in 30.0capital efficiency 25.0 20.0 15.0 10.0 5.0 0.0 Infotech Ent Infinite Zensar Mastek Geometric Sonata Ind Average 3i Info Subex Polaris Rolta KPIT NIIT Tech Mind Tree Valuation anomaly No need to quote below peers Zensar is getting valued below the average valuations for mid-cap IT companies. In the section on peer comparison below, we have further split that mid-cap IT space into two parts: companies getting low valuation, and those fancied somewhat more in the market. There is a distinct difference in the valuation of companies in the two groups. Zensar seems to be getting clubbed amongst the lesser fancied midcaps. While the better valued peer group quotes at a trailing PE of 8.65, Zensar is quoting at a PE 4.21. As we have seen above, the strong financials and strengths in key business niches suggest there is no need for a valuation gap. Even if the gap is partially bridged, the stock offers a strong upside. Risk factors Higher contribution from single clientZensar has high Zensar has around 31% of revenue coming from its largest client, CISCO,dependence on which it lists in its manufacturing vertical. This makes Zensar highly sensitiveCisco. This year, to performance of CISCO and its decisions regarding IT expenditure. Withbusiness from Cisco CISCO undergoing structural changes and facing budget cuts, Zensar may notcould suffer witness major growth in this account in near future. But Zensar is now diversifying its business into various segments to mitigate dependence on Cisco. Zensar will also get help from cross-selling to Akibia clients which will again reduce this risk. Currency RiskWhile Zensar has Revenues for Zensar are mostly in foreign currency, making Zensar highlymanaged currency sensitive to currency movements. Zensar is already looking to diversify itswell, current geographical client base in emerging countries and Asia pacific.volatile financial It must also be pointed out that Zensar has managed forex risk well so far.markets pose a risk While some other midcap peers gave nasty currency shocks around 2008/09, Zensar was not among these.Four-S Research 6
  • 7. Company Report: Zensar Technologies 23 Aug’11 Peer Benchmarking The peer set: midcap IT companiesZensar is squarely With a market capitalisation of around Rs 5.55 bn, Zensar is a midcap ITplaced in the middle company. The table below gives key headline data for the midcap IT space. Asof the midcap IT can be seen, sales, EBITDA and PAT for Zensar place it close to the midpointuniverse by size of midcap IT universe. However, in terms of value ascribed to the business, whether via market cap or EV, Zensar falls considerably below peer averages. This is also evident from the last row of the table below, where we have given how Zensar compares against peer averages. Market EV Sales Sales 3 EBITDA EBITDA PAT PAT 3 Cap yr 3 yr yr CAGR CAGR CAGR 3i Infotech 5,452 27,248 25,875 6% 50,415 8% 2,536 -2% Geometric 2,448 2,384 6,229 2% 9,235 129% 575 `-ve Infinite 3,061 3,602 8,894 34% 14,787 59% 1,072 53% Infotech Ent 12,705 9,208 12,175 16% 18,034 20% 1,397 28% KPIT 13,118 12,128 10,235 14% 15,221 10% 946 15% Mastek 2,485 1,215 7,138 -13% 8,722 -26% 677 -31% Mindtree 14,122 13,709 15,332 10% 17,850 20% 1,016 32% NIIT 10,569 9,485 12,323 12% 20,480 29% 1,822 30% Polaris 13,239 11,874 16,200 7% 21,390 10% 2,119 31% Rolta 15,827 28,377 17,411 13% 37,402 -12% 3,821 12% Sonata 3,277 2,093 14,111 -6% 14,008 -4% 856 6% Subex 3,119 8,535 4,926 -6% 13,128 61% 788 NA Average 8,285 10,821 11,984 7% 20,056 25% 1,469 17% Zensar 5,552 7,240 11,483 12% 20,715 11% 1,363 25% (Rs mn) Comparing key P&L items Note the CAGRs3 year CAGRs for The key factor to note in the above table is the 3 year CAGR ratios for salesZensar are above and net profit. On each of those counts, Zensar fares as much or better thanpeer averages peer averages. Profitability: Sustainable strong profitsProfitability better Zensar has been able to maintain good profitability across last few years. Its netthan peer averages margin has been around 12-13%. This is again in line with peer group average. For FY11 for example, the peer set has a net margin of 12.3%, as against 11.9% for Zensar.Four-S Research 7
  • 8. Company Report: Zensar Technologies 23 Aug’11 FY11 Margin (%) Company EBIDTA PAT Rolta 21.5 21.9 Polaris 13.2 13.1 Infotech Enterprise 14.8 11.5 Mindtree 11.6 6.6 KPIT 47.7 29.6 NIIT 16.6 14.8 3i Infotech 19.5 9.8 Infinite 16.6 12.0 Subex 26.7 16.0 Sonata 9.9 6.1 Geometric 14.8 9.2 Mastek 12.2 9.5 Average 16.7 12.3 Zensar 13.6 11.9 Balance sheet ratios Much better on leverage Debt Equity (x) Interest Coverage (x) Company FY10 FY11 FY10 FY11 Rolta 0.8 0.7 6.8 1.1 Polaris - 0.0 176.3 99.3 Infotech Enterprise - - 52.8 85.6 Mindtree - 0.0 55.0 98.0 KPIT 0.3 0.2 15.5 85.3 NIIT -0.1 0.4 74.8 292.6 3i Infotech 2.2 1.9 2.8 2.5 Infinite 0.2 2.6 36.3 78.5 Subex 2.2 2.6 1.4 2.9 Sonata 0.1 0.1 16.3 15.8 Geometric 0.1 0.0 14.3 69.7 Mastek 0.1 0.0 47.0 66.7 Average 0.5 0.7 41.6 74.8 Zensar 0.1 0.5 52.6 23.6While Akibia deal While large cap IT companies are sitting on cash hoards, midcap IT companieshas pushed up debt, have struggled with debt. Not so for Zensar. While it currently does not have ain general Zensar cash hoard due to the recent acquisition, its debt situation is at least far moreFour-S Research 8
  • 9. Company Report: Zensar Technologies 23 Aug’11has maintained low manageable compared to many of its better fancied midcap IT peers.net debt Among larger peers, 3i Infotech has a big mess on its balance sheet. Rolta’s debt-equity also generally has been larger than Zensar. Better liquidity ratios Current Ratio (x) Cash Ratio (x)Company FY9 FY10 FY11 FY10 FY11Subex 0.68 0.50 0.61 0.06 0.02Sonata 1.23 1.65 1.78 0.20 0.25Infinite 1.33 1.53 0.61 0.10 0.20Mastek 1.74 2.88 2.85 0.61 1.243i Infotech 2.92 2.53 4.41 0.65 0.32NIIT 1.17 2.06 2.54 0.40 0.65Geometric 2.29 2.59 2.94 0.57 0.21KPIT 1.38 2.39 3.05 0.59 0.81 Mindtree 1.52 1.79 2.47 0.12 0.15Polaris 2.16 1.67 1.76 0.42 0.41Infotech Enterprise 2.66 2.80 3.77 1.28 1.08Rolta 3.25 3.77 4.53 0.50 0.21Industry Average 1.8 2.18 2.61 0.46 0.46Zensar 2.42 2.83 1.94 0.95 0.34 We can see Zensar maintaining historically better liquidity status compared to industry. Even with reduced liquidity due to Akibia acquisition, Zensar still manages to maintain stronger liquidity condition than most of its peers. Comparing Peer Valuation Dividing peer set into two parts In the table below, we have divided midcap IT companies into two parts – those getting low valuations, and those getting somewhat better valuations. In the first lot are companies like Subex, Sonata, 3i, etc., and in the second lot are KPIT, Hexaware, Mindtree and so on. Valuation* CAGRs (FY’09 to FY11) RatiosCompany P/E EV/ EV/Sales Sales NP D/E ROCE ROE EBIDTALess valued midcapsSubex 3.96 6.50 1.77 -6.0% NA 2.6 14% 32%Sonata 3.83 1.49 0.15 -6.0% 6.0% 0.1 24% 22%Infinite 2.86 2.44 0.41 34.0% 53.0% 2.6 58% 62%Mastek 3.67 1.39 0.17 -13.0% -31.0% 0.0 11% 12%Four-S Research 9
  • 10. Company Report: Zensar Technologies 23 Aug’113i Infotech 2.15 5.40 1.06 6.0% -2.0% 1.9 12% 22%NIIT Tech 5.80 4.01 0.77 12.0% 30.0% 0.4 30% 48%Geometric 4.26 2.58 0.38 2.0% NA 0.0 33% 29%Average 3.79 3.40 0.67 4.1% 11.2% 1.1 26% 32%Higher valued midcapsKPIT 13.87 7.97 1.19 14.0% 15.0% 0.2 18% 31%Mindtree 13.90 7.68 0.91 10.0% 32.0% 0.0 15% 14%Polaris 6.25 5.55 0.75 7.0% 31.0% 0.0 19% 22%Infotech 5.11 5.11 0.78Enterprise 16.0% 28.0% 0.0 13% 14%Rolta 4.14 7.59 1.63 13.0% 12.0% 0.7 2% 22%Average 8.65 6.78 1.05 12.0% 23.6% 0.2 25% 32%Zensar 4.16 4.62 0.63 17.0% 25.0% 0.5 33% 34%*based on latest financial year The low PE midcap companiesLow PE IT Let’s see the business ratios of the low PE set. As a group, their sales havemidcaps have low grown at a CAGR of 4% over FY08-11, while their net profit has grown atgrowth rates. 11% in the same time.Zensar is doing In the lot, there are some companies specifically struggling with profitability.better Mastek has made net losses in the last 3 quarters, and in two of these, it made an operating loss as well.Low PE IT Apart from differential growth rates, another key point to note is the vastlymidcaps also have different D/E ratios for low PE versus high PE companies. In the low PE set,poor balance sheets Subex, Infinite and 3i have D/E ratios around 2x or more. Couple of these companies have outstanding FCCBs which are unlikely to be converted into equity. These will need to be refinanced. In other words, the low PE set is getting low valuations since it is riddled with one or more issues: sub-par growth, high D/E, consequently low capital efficiency ratios. In the cases where D/E is more than 2x, there could be some minor liquidity concerns in the market. Besides issues with their P&Ls and balance sheets, we suspect the market may have issues with corporate governance levels in some of these companies. Take a company like 3i for example. This company did an IPO at a price of RsGovernance quality 100 in April 2005. In more than 6 years of trading since then, the company hasquestionable insome midcaps rarely quoted above its IPO price. It has done two dilutions at prices considerably below its IPO price. The company took a large Rs 2.8bn write- off in FY10 for discontinuing operations of the kiosk business. Yet, there has been no change in management. This is a supposedly professionally run company, yet there seems to be little accountability. In a scenario like this, no wonder valuations have slid down. The high PE midcap companiesHigh PE midcap The P&L and balance sheet ratios are starkly different for high PE midcap ITcompanies have companies. These have grown sales at a 3 year CAGR of 12% versus 4% forFour-S Research 10
  • 11. Company Report: Zensar Technologies 23 Aug’11better numbers the low PE companies; these have grown net profit at a CAGR of about 24% versus 11% for low PE companies. More importantly, note the D/E ratio and the capital efficiency ratios. Half of the high PE companies are debt free, while none have a D/E ratio more than 1x. Not all is rosy and clean in this universe as well. There is stuff here which could make an institutional investor uncomfortable. For example, atleast a couple of the peers in this set both took large write-offs on forex derivates. So where to place Zensar: with low PE or high PE companies? The market is clubbing Zensar with low PE companies. Yet any performance comparison does not quite support this act of the market. The above table clearly shows Zensar’s performance ratios are more like the high PE set, as against the low PE set.Zensar’s numbers Specifically, check this:and management  Zensar has grown at a sales and net profit CAGR more in line with thequality put it in high PE set.high PE set  Zensar has generally maintained low D/E. The acquisition of Akibia raised D/E to 0.5x, still it is distinctly different from the low PE set.  Capital efficiency is among the best in the midcap IT universe.  Zensar has managed its forex exposure well, it has not had to take a write-off.Four-S Research 11
  • 12. Company Report: Zensar Technologies 23 Aug’11 Valuation and Price Target Deserves to be rated with the high PE set We think the market should assign valuation more in line with the high PE set to Zensar. As explained above, this assertion is based on Zensar’s better financials; its increasing robust business model where it is now amongst the top players in India in Oracle and infrastructure management; and its likely growth momentum over the next two years. Price TargetZensar should hit a The average discount the better performing set is getting is a PE of just lessprice of Rs 250 by than 9x based on historical values. Assigning a 15% growth rate to this set, theMarch 2013. We expected FY13 PE comes to about 6.5x.expect it to rerate While we believe that Zensar should quote at parity, let’s assume a discount oftowards valuations 25% to this value which means a forward PE of about 5.2x FY13 numbers.of better IT Based on expected earnings per share of Rs 44 for FY13, this leads us to anmidcaps expected share price of Rs 230 for March 2013.Four-S Research 12
  • 13. Company Report: Zensar Technologies 23 Aug’11 Zensar’s Business Getting a grip on Zensar’s business modelValuation suggest The market discounting for Zensar’s business model would seem to imply thatmarket negative on it is a totally commodity business model, perennially working under severeZensar’s price pressure; or the business is already past the maturity phase, into whatfundamentals you may call in standard business cycle terms – the ‘decline phase’. Let’s first see the key points on the business model here which we think are perhaps influencing investor view on Zensar:  There is no differentiator – Zensar’s business is commodity  Is this a ‘declining’ business Zensar’s business more commodity than an average IT company? There is a lot of commodity element to Indian IT companies – whether it is Zensar, or TCS of Infosys, there is no denying that. A SAP implementation project, or a legacy maintenance project, could be done equally well by a two dozen or more companies in India. While large IT companies may get the benefit of size and superior brand, midcap IT companies don’t have this luxury. Product companies, like Oracle Financial Services, are an exception. Midcap IT companies realise the need to differentiate in order to create niches for themselves where they can compete effectively, and enjoy good business economics. The typical ways are: pick one or more technology service lines, or verticals or geographies to build relative advantage. Some others have tried to enter product business, sometimes by acquisition.Market seems Zensar is no different; the management is focussed on the need to buildunaware of segments of relative strength. Some areas where Zensar stands out:Zensar’s areas of  Its Oracle practice: Zensar has among the best practices in Oraclestrength related projects in mid-cap IT. Zensar has 1,300+ people in its Oracle practice, has completed 500+ client engagements over the last decade. Zensar had bolstered this practice in 2007, with the acquisition of Thought Digital.  Strong traction in South Africa: Zensar has already built a good presence in South Africa. It has acquired some fairly large customers there, for example, 3 of the top 5 insurance companies.  Infrastructure Management: The acquisition of Akibia has completely altered Zensar’s position in this business. With an annual revenue rate of well over Rs 4.5bn from just this business, Zensar has a superior offering to most midcaps in IM.Four-S Research 13
  • 14. Company Report: Zensar Technologies 23 Aug’11 Is it in the numbers?Zensar’s superior Whatever be the story, an analyst will ultimately seek evidence in themargins suggest the numbers. So, for a mid-cap IT company, what number can show somethingbusiness is better about how commoditised the business is?than what the EBITDA margin is one relevant number to look at. If the business has nomarket thinks differentiator, EBITDA margin should compare poorly to peers. For Zensar, as we have noted earlier, this is not the case. While there are companies like Sonata, Mastek and Mindtree which have EBITDA margin in the 10-15% range, Zensar has an EBITDA margin of 13.6% in FY11. Zensar has increased its operating margin from 12-13% levels in FY07 and FY08, to around 18% levels in FY10 and FY11, signifying increasing value add in the business mix. Is Zensar’s business a ‘declining’ business?While organic The first step to answer this would be to look at past growth rates – for thegrowth is in single sector, and the company.digits, smart Net sales have grown at a CAGR of 17% over FY07-11. While some of theacquisitions have growth has come through acquisitions, the expanding operating margins, yearsallowed double of positive cash flow and manageable debt show the business is enhancingdigit topline CAGR value. While organic growth rates have fallen into single digits currently, this is more a result of global growth slowdown. In other words, slower IT sector growth rates are have a large cyclical component.. But is de-growth imminent?Market has fears IT services sector as a while continues to grow, and no one is questioning thethat small IT firms future of India’s IT services business as a whole. The issue here is – dowill start to midcap IT companies have a role anymore, or is it a game only for the bigdegrow. So far no boys?signs of this We believe this is the crux of the issue. The market has somewhere taken the view that midcap IT companies will not be able to compete in the future, and within midcap IT, Zensar is particularly exposed. But is this assertion true, and if so, how exactly will it play out? Let’s see on the second part – how exactly will a de-growth play out. The typical mode for degrowth would be – the overall market shrinks, so some players have to drop out. Here this is not exactly the case. The overall IT services market is stillLarge IT firms are projected to grow. So what the stock market is saying this – large ITlooking for largerclients. SME companies are used to growing at 30% plus, if the overall market growth rate slows down to 10-15%, they will eat up the small companies to maintain theirmarket open for own growth rates at 20-30%.midcap IT While this may very well happen, but current evidence does not point to that.Four-S Research 14
  • 15. Company Report: Zensar Technologies 23 Aug’11 Large IT companies are trying to go up the chain, not come down the chain. They are trying to do things like: become consulting led, take over the entire IT organisation of large clients, etc. So the large IT companies are not yet competing with small IT companies for the same client. Any relevant number for this?Number of active We think the correct numbers to check this would be things like total activeclients continues to clients, and average business/client. When these numbers start showing aincrease. This is declining trend, then certainly fears on the future of midcap IT would rise.evidence degrowth Zensar has increased its total client base from 200 at the end of FY07 to aboutfears are overblown 400+ by the end of FY11. In sum – numbers don’t support stock market perception On both counts – the commodity nature of business, or risk of degrowth – we find the market’s fear overblown. Zensar’s margins are pretty good. And the next two years it is set to grow. The risk of a new US slowdown is certainly there, but that affects the entire Indian export sector, not just Zensar, or India IT services industry. Notwithstanding the US recession threat, Zensar at the end of FY11 is actually strongly positioned for growth. In the next section, we see how. Positioned for growth with an increasing robust business modelZensar has biffed The Zensar management implemented two big developments at the end ofup its business FY11 which should help drive growth over FY11-13. These are:model  The Akibia acquisition  Re-structuring the business into 5 verticals Let’s look at how these two drive growth and make the business model more robust. The Akibia deal – a game changer In November 2010, Zensar made a big move in the rapidly expanding Infrastructure Management and Information Security segment by acquiring Akibia Inc. With a turnover in excess of $100mn, this not only adds significant turnover to Zensar’s topline, it will also add to Zensars addressable market and growth potential.Akibia deal With this acquisition, Zensar will expand its potential market and growthtransforms opportunity in not only infrastructure segment but will help in providingZensar’s position in mission critical solution. This acquisition helps Zensar to use combined andthe IM space integrated services to cross sell among existing client base. Akibia will help expand Zensar’s customer base and will provide global operational scale and opportunity to enter new geographies and market more efficiently. It added a team of 350 professionals with 2 delivery centres in US and Europe. This enhanced capability will help Zensar bid for multi-million dollar projects which involve multiple service lines.Four-S Research 15
  • 16. Company Report: Zensar Technologies 23 Aug’11 About Akibia Akibia is a US based firm, founded in 1988. It provides infrastructure management services to companies worldwide to help them optimise, manage and support their infrastructure. It has more than 900 customers. Akibia helps its clients to improve the availability, reliability and performance of their data centre, network and security infrastructure. With its expert consulting Akibia helps IT organizations reduce costs, increase efficiencies and manage risk in the data center. The Akibia Impact There are several ways this deal will impact Zensar’s numbers:FY12 will see full  Immediate topline impact: In FY11, the Akibia numbers formed partreflection of Akibia of the topline only for Q4. FY12 will see the full integration of Akibiarevenues numbers with Zensar. This itself will lead to a growth of over Rs 3.5bn in topline for FY12.  Gives a big push in the important IM space: IM, or specifically,Will lift overall remote IM (RIM) is among the fastest growing IT sub-segments. IM isorganic growth a large $370bn market, of which remote IM is about $95-108bn. India is rapidly gaining traction in the RIM market. Offshoring to India is growing at above 20%, according to Gartner. Before the acquisition, Zensar’s presence in this space was small, though growing rapidly. By 2010, this business was 4 year old at Zensar, with 50+ clients, serviced by 402 associates and growing at over 50%. Akibia had a client history of about 900 clients at the time ofZensar is now acquisition, and 325 employees. With a revenue run rate of aboutamong top 10 $108mn, this has added to Zensar’s capabilities immensely. Also, 70%players in IM in of this revenue is recurring, giving high revenue visibility.India The Akibia acquisition puts Zensar among the top 10 players in IM space in India.  Cross selling opportunities: Akibia has a large client base of leading global companies. Zensar sees significant cross selling opportunities in this deal. For example, a large investment bank is a customer ofCross selling Zensar in Asia and Akibia in the US. So Zensar can sell Akibia to thisopportunities exist bank in Asia, while in the US, it can hope to make inroads with the help of Akibia. The banking vertical itself is expecting almost 70% of their growth in the next 1-2 years to come by cross-selling. Geographical expansion of Akibia’s lines is another way to benefit from the acquisition.Four-S Research 16
  • 17. Company Report: Zensar Technologies 23 Aug’11 Verticalisation: More focus, more expertise, deeper relationshipsVerticalisation: a The IT market place is changing from technology support to solution selling.need of the hour IT service companies are moving away ahead from mere application development and outsourcing to be a transformation agent for their customers. With a well rounded capability set in service offerings, growing share of enterprise revenues, Zensar felt it was ready to into business solution selling mode. Recognising this trend, Zensar has restructured as of FY11 into 5 focus verticals: BFS, manufacturing, retail, insurance, connected services. Verticalisation of the business will help Zensar use its deep industry knowledge and technology expertise to cater more effectively to customers’ requirements. Zensar is also looking to push further its consultant-based model which integrates consulting with business solution development. It is building a strong consultant team with extensive experience in different verticals like banking, retail, insurance, etc, they will consult Zensar customers to help them achieve their business goals with Zensar solutions. Below we take a look at the key verticals.Vertical Manufacturing: Among top IT spenders Zensar has strong presence in the manufacturing sector which is one the top IT spending sectors globally. The manufacturing sector constitutes 39% of top line for Zensar making it the most important vertical for Zensar.Largest revenue Zensar’s expertise lies in discrete manufacturing which constitutes more thancontributingsegment 60% of overall manufacturing companies IT spend. Working as a catalyst with global manufacturing companies, Zensar is helping clients to maintain competitive edge with the help of various enterprise class solution core to manufacturing and supply chain.Major Clients: Zensar has been able to gain substantial market in various attractive sub-CISCO, Trimble, segments like consumer products, Hi tech, Industrial among others whileSDS, NCR, looking very aggressively to increase share in other appealing segments likeNetgear, Activision, aerospace & defence and automotive. Zensar has been providing variousFujitsu services like IM, EBS & mobility AMS & Web 2.0, BPO successfully with strong technology capability in Oracle, MS dynamics, SAP, etc. Almost 80% of manufacturing revenue coming from single customer i.e.20-25% growth in CISCO, is a potential risk factor, which can put manufacturing vertical revenues in a tight situation whenever CISCO puts constraints on its IT plans.non-CISCO This is visible in FY12, where revenue contribution from CISCO businessaccounts expected. could stay flat or come down. The manufacturing vertical is looking forward to reduce this dependency on single client by expanding non CISCO accounts to mitigate this risk. The aim is to grow non CISCO manufacturing accounts by 20-25% in first year with similar or better prospects in next two years. Most of this growth (~75%) is expected from new accounts which are anticipated with verticalisation strategy and Akibia cross-selling.Four-S Research 17
  • 18. Company Report: Zensar Technologies 23 Aug’11Looking for Engineering and PLM is one gap in Zensar’s ability to cater to theacquisition in US manufacturing vertical. Zensar aims to plug this gap through an acquisition inand India US/Europe in the medium term. Zensar has also developed their own IP like Autozenics and NExchange alongDeveloping IP like with other IP in areas of traceability, quality and PLM, SCM. This showcases Zensar’s belief on creating own IP and flourishing innovation withinAutozenics organisation. Company has high hopes from the Autozenics product, which is a Microsoft dynamics solution for SME in auto cluster.Vertical Banking and Financial Services BFS, along with insurance, constitutes 18% of total Zensar revenue in FY’11 with BFS itself touching $45mn making it second largest vertical within Zensar. Zensar has core competence in BFS sector due to rich industry experience and technology expertise with good understanding of domain, process and technology. Business Lines Contribution Service Lines Contribution 42% 58% 26% 18% 22% 14% 12% 8% Run The Bank - Others Testing Application Dev Others Private Banking Investment Banks Management Asset RTBExpecting rise in Zensar provides range of services in this sector from implementation totop line by cross- consulting, process outsourcing, maintenance, infrastructure and testing acrossselling with Akibia various sub-sectors like Retail Banking, Private Banking & Wealthcustomers Management, Capital Markets, Compliance & Risk Management. The Company is looking to grow in this segment at the rate of 20-25% in next 2 years with the help of existing strong clientele base such as UBS, Credit Suisse, CLSA and KBW. Zensar plans to break into Fintech Top 100 within next two years. For this,Aims to break into Zensar will need to hike revenue from BFS vertical to around US$55-60mnFintech Top 100 in revenue from existing US$45mn in FY11. Zensar plans to achieve this2 years growth by establishing a centre of excellence to build frameworks and IP for various sub-sectors like investment banking. While Zensar is not doing much in retail or commercial banks, it has decent expertise with investment banks. Most of the projects in this vertical are of the type of Run The Bank service which mainly deals with maintenance andFour-S Research 18
  • 19. Company Report: Zensar Technologies 23 Aug’11 support projects which give Zensar assured annuity business. Till now Banking and Financial services vertical was more focused onThe vertical expects emerging market with 90% business coming from this market. Zensar is aware of the need to derisk geographically; accordingly the vertical would devotestrong cross selling more attention to revenues from developed markets. This will also helpopportunities withAkibia Zensar to push up margins from banking vertical. The BFSI vertical has strong opportunity of cross-selling their services to Akibia clients with as many as 23 unique banking and financial services clients in Akibia’s portfolio.Vertical InsuranceZensar has a built The insurance vertical predates the current round of organisation widegood expertise in verticalisation. Zensar had created this vertical in 2008, recognising the needinsurance vertical to give specific focus to this. A result of this early start is that the vertical team believes it has the domain expertise now to target top 5 players in each geography – the Americas, Europe, South Africa, APAC. As the leading insurance companies, who were early IT adopters and are now stuck with legacy systems, try to transfer to the latest technology, Zensar hopes to benefit. It has already executed large projects successfully in South Africa among other projects. Account share (%) Line of Business 1% Assurant 1% 1% 1% Silice Health 9% Liberty Life 24% Life & Annuities 40% 13% Prudential Mutual Funds Discovery 14% 14% 60% Holdings RMA Short term & 22% Speciality Stanlib Mutual & Federal The insurance vertical currently has a high US tilt, due to business from its top client Assurant contributing 60% of vertical revenue.3 of the top 5 Zensar is now looking to expand their geographical reach by targeting Europe,companies in South South Africa and other geographies like Australia, India, etc. Zensar hasAfrica are clients already bagged South Africa’s 3 of top 5 Insurance companies and the top organisation in India. With this, Zensar has become South Africa’s biggest Indian IT vendor.Four-S Research 19
  • 20. Company Report: Zensar Technologies 23 Aug’11 Zensar has strong strategic plans to build up this segment by targeting top 5 organisations in all major geographies with major focus on life, health and P&C. Zensar has strong presence in health insurance segment with majority clients coming from that area. Now Zensar is looking to build pipeline in life and annuities for Europe region while looking to maintain stronghold in health segment in US region and focusing on P&C segment in US, Europe and South Africa region. With 6 insurance clients in Akibia’s portfolio, Akibia- Zensar cross-selling opportunities also look good. This alone can drive add almost 10% growth to the vertical revenues. With strong visible pipeline, the Insurance vertical is expected to grow at a growth rate of 25-30% for the next two years. Strong growth is envisioned in US and UK region while Zensar is looking to double top line from Australia region which currently has very low base though. Zensar is also working on developing IP in this segment with focus on Multichannel Platform for Insurance, Readily deployable SOA components and Compliance enabled Testing framework. The vertical is looking to add almost 15% of revenue from IP sales in next two years.Vertical Retail: a $146bn IT market Zensar has very positive outlook towards retail vertical which was a $146bn market opportunity in year 2010 with speciality and grocery segment constituting almost 60% of market. With strong relation with EuropeanProviding entire market which makes ~60% of total revenue, Zensar is looking to capturegamut of services much bigger pie in this segment by expanding in other territories. Zensar isfrom professional keeping focus on mid size segment and aggressively pursuing opportunity inadvisory to IT their strong domains like Speciality, Groceries and Department providing theirstrategy, BI and expertise services like BI & analytics, AMS & Web 2.0, IM, and Packageretail specific solutions.solution. Zensar is already scouting different regions to diversify geographical reach within the retail sector by reaching out to other markets. For example, it is targeting US which is driven by its current e-retailing trend to capture more and more clients based on its expertise in this domain. Zensar is also spreading its client base in emerging markets like middle east region and garnering few more clients in Australia again with recent success of opening account for web retailing. Zensar has developed a clear cut strategy to be among top 3 service providers in non-US markets such as Europe, ME, South Africa, India, among others, which will act as a charge for retail vertical growth. The main enabler for this would be the strong Oracle capabilities Zensar has developed. Close to 90% of its current business is Oracle oriented. Zensar is also witnessing good demand for its SAP offering with good traction from US market. With this strong pipeline, retail vertical is also looking to expand its offshore developing center strength. Zensar has developed its own IP in this segment like MultiFour-S Research 20
  • 21. Company Report: Zensar Technologies 23 Aug’11 channel, SmartShop, ZRMS and Batch Scheduler. Zensar boasts of strong clientele in this space like Carrefour, NAAFI, Wet Seal, Acosta etc. Zensar has rolled out its SmartShop solution as of now only in India and company is experience positive response from the market. With further development and refinement Zensar looks to ring out this offering in other markets which will add up Zensar revenue from its IP products.Vertical Connected Services: Utilities, Healthcare & Government Connected services can be considered as incubator vertical for emerging or growing verticals within Zensar. The three emerging verticals currently housed here are healthcare, utilities and government. Within healthcare, Zensar is focussed on healthcare providers like hospitals and path labs, in the US geography. Whereas US healthcare market is showing high prospects with US$8-10bn per annum spend expected from healthcare providers till FY2015. The driver is the regulation driven Y2K like opportunity, the ICD-10The switch to ICD- remediation. The US healthcare industry needs to transition to ICD-10 by 110 presents a big October 2013. By this date, ICD-10 codes must be used on all Healthopportunity in Insurance Portability and Accountability Act (HIPAA) transactions, includinghealthcare space outpatient claims with dates of service, and inpatient claims with dates of discharge Zensar is looking to build domain capability in healthcare through partnerships and to drive POC for new service areas. For Utilities, it wants to focus on US and Europe. The areas of focus are smart grid and smart metering. IM solutions could also help get business here. Zensar has strong 15 years hands on domain expertise in Utilities practices which Zensar is looking to leverage to garner more similar projects In the Government vertical, Zensar is still finding its feet in the Indian marketplace. Here the market already crowded with several other firms, Zensar needs to find its niche here. The company is developing low delivery cost model which is very vital to gain government projects where customers are like state govt, municipal corps and defence. Revenue Mix: A diversified sales mix Zensar’s revenues are distributed across verticals. Manufacturing contributes around 39% to Zensar’s top line. BFSI and retail are other major vertical for Zensar contributing 18% and 8%, respectively, for FY11.Four-S Research 21
  • 22. Company Report: Zensar Technologies 23 Aug’11 Revenue Mix Revenue By Industry 2011 Revenue By Industry 2010 Manufacturing & Manufacturing & Telecom Telecom Retail Retail 28% 15% 39% 45% 11% BFSI BFSI 20% 2% 18% 8% Pharma, Textiles & 9% Pharma, Textiles & Utilities Utilities 5% Media Media Others Others Zensar is focused on diversifying its business mix across verticals which can be seen in the trends for last few years. With decreasing dependency in manufacturing & telecom sector from 45% in 2010 to 39% in FY11 and 20% of BFSI in FY10 to 18% in FY11 Zensar’s deliberate efforts to expand their horizon and to capture opportunities in other verticals are very much evident. Global scale of operations Zensar derives its revenues across the globe with sales and operational presence in more than 11 countries including US, UK, Germany, Sweden, Finland, Middle East, South Africa, Singapore, Australia, Japan and Poland.Geographicaldiversification plan The share of the US market in total revenues went up in FY11, 64% from 60% in FY 10. This was mainly due to the Akibia acquisition, and the impact of its salesin place mix. In fact share of the US market was around 50% of revenues in FY07 and FY08. The increase in share of the US market has gone hand in hand with increasing EBITDA margins, indicating the lucrativeness of that market. Zensar is now looking to expand its offerings to other emerging market such as China, India, Middle east and SAARC countries. This is evident with setting upUS contributing of a delivery center in China and upcoming regional delivery center in Jordan.64% of revenue. Geographical Revenue Break up FY11 23% USA 13% 64% Europe Rest of the WorldFour-S Research 22
  • 23. Company Report: Zensar Technologies 23 Aug’11 Historical Geographical Revenue Break 12000 10000Focus on seeking 8000growth in new Rest of the World 6000markets. Europe 4000 USA 2000 0 FY07 FY08 FY09 FY10 FY11 Rs in mnHedging Territory Zensar’s pursuit to hedge the geographical risk is also evident with new emergingRisk territories like South Africa which is one of the fastest growing territories for Zensar. Zensar has also managed to garner faster growth in the Middle East. Company is also looking to invest heavily in India and China to build presence. Strong & diversified client baseZensar has been The company caters to clients all over the world providing end to end services totrying to reduce their clients. Zensar boosts strong client base of more than 300 customers,dependence on including several Fortune 500 companies.Cisco Top 5 clients accounted for 46% of FY11 revenue whereas top 10 clients accounted for 54% of revenue. Revenue Top Client wise Top 10 client Top 5 client FY10 64% 54% FY11 54% 46% Zensar boasts diversified client portfolio with clients from various verticals. Some sample clients: banking vertical has Credit Suisse, UBS, KBW; retail has M&S and Carrefour; manufacturing and media like CISCO, Activision, Fujitsu; insurance has clients like Assurant, Investsec, AXA, Prudential; and connected services has clients like National Grid and Morrison. Chart 3: Client Concentration Client Concentration FY07 FY08 FY09 FY10 FY11 Top 5 client 55% 43% 44% 49% 46% Top 10 client 69% 51% 52% 60% 54%Four-S Research 23
  • 24. Company Report: Zensar Technologies 23 Aug’11 Financial Analysis and Growth Outlook 26% CAGR for revenue expected during FY’11-134 year revenue The Company’s net revenues grew at a CAGR of 17% over FY’07-’11 to RsCAGR is 17%, 3 11.4bn from Rs 6bn in FY07.year growth is 12% The 3 year revenue CAGR is 12% as presented earlier. Revenue Growth 12,000 10,000 8,000 6,000 Other Income Revenue from Operations 4,000 2,000 - 2007 2008 2009 2010 2011 Rs in mnOver FY11-13, The top line however is expected to grow at CAGR of 26% over FY’11-13 on theZensar will grow back of current acquisition of Akibia, which will add an incremental Rs 3.5bn tofaster than in Zensar’s top line for FY12. Further organic and inorganic growth is expected toFY08-11 boost revenue of Zensar to reach Rs 19bn by FY13. Revenues Growth 18000 16000 14000Growth driven by 12000Akibia acquisition 10000and inorganic 8000growth 6000 4000 2000 0 FY09 FY10 FY11 FY12E FY13E Rs in mnFour-S Research 24
  • 25. Company Report: Zensar Technologies 23 Aug’11 Segment PerformanceZensar divides GTS (Global Transformation Services) and EAS (Enterprise Applicationbusiness into 2 key Services) are the major service offerings from Zensar which constitute 65% andparts: GTS and 24% of revenue to Zensar, respectively. Data Centre, Network & SecurityEAS Services (PSI Holdings) segment is also making headway in Zensar with ~11% revenue contribution from it in FY11 top line. Segment-wise Revenue Break-Up 8,000 Global TransformationGTS and EAS 7,000 Services (GTS) 6,000constitute major 5,000portion of Zensar’s Enterprise Application 4,000 Services (EAS)revenue. 3,000 2,000 1,000 Data Centre, Network & Security Services (PSI 0 Holdings) FY07 FY08 FY09 FY10 FY11 Rs in mnStrong Growth Global Transformation Services (GTS)seen in GTS GTS segment grew at a 4-year CAGR of 14% to Rs 7,433mn in FY’11 from Rssegment 4,358mn in FY’07. This is mostly organic growth, since the acquisitions Zensar has done do not lie in this space. This is also the most profitable segment for Zensar. Global Transformation Services (GTS) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY07 FY08 FY09 FY10 FY11 Rs in mn Enterprise Application Services (EAS) Enterprise Application Services (EAS) segment grew at a 3-year CAGR of 13% to Rs 2,757mn from revenue of Rs 1,700mn in FY 07.Four-S Research 25
  • 26. Company Report: Zensar Technologies 23 Aug’11 Margins expected to improve after initial dipMargins may dip Zensar has managed to increase EBITDA at the impressive CAGR of 19% fromthis year due to FY08 to FY11. Zensar has shown strong financial discipline and bottom lineAkibia acquisition focus by maintaining EBITDA margin above 13% in FY11 reaching as high asand global turmoil 17.8% in FY 10 from 12% in FY 08. This growth in EBITDA margin is mainly due to improved contribution from higher margin GTS services which has better margins compared to other services. Acquisition of Akibia will ring in more revenue from Data Centre, Network & Security Services which may bring pressure on Zensar’s margins for short term. But further improvement in margins is expected in longer run as company strives to enter other profitable services and verticals. Consistently strong EBITDA performance EBITDA 1,800 20% 1,600 1,400 16%Zensar showcased 1,200 12%strong EBITDA 1,000growth of 19% 800 8%CAGR in last five 600 400 4%years. Even better 200growth expected in 0 0%near future. 2008 2009 2010 2011 EBITDA EBITDA margin Rs in mn Zensar net profit has grown at CAGR of 28% in last 3 years expanding net profit from Rs 640mn in FY08 to Rs 1340mn in FY11. Zensar has improved these net profit figures while keeping focus on net margin maintaining strong net margin of around 12% in FY11. Net profit is expected to show a CAGR of 23% growth over the next two years. This is mainly resulting due to expanding top line and improvement in margins too. NET PROFIT 1500 15%Zensar net profit 1000 10%has grown atCAGR of 28% in 500 5%last 3 years 0 0% 2008 2009 2010 2011 Reported net profit Net margin Rs in mnFour-S Research 26
  • 27. Company Report: Zensar Technologies 23 Aug’11 Financial AnnexureProfit & Loss StatementIncome Statement FY07 FY08 FY09 FY10 FY11 FY12E FY13ERevenue from Operations 6,059 7,829 9,081 9,528 11,383 15,607 17,820Employee Cost 3,995 5,401 6,133 6,212 7,416 10,712 11,974Other Operating Expenses 525 581 614 567 668 1059 1209Sales, Admin & GeneralExpenses 680 887 1,034 1,000 1,596 1,873 1,960Miscellaneous Expenses 29 35 42 49 152 74 85Total Expenses 5,230 6,904 7,822 7,828 9,833 13,718 15,228EBITDA 828 925 1,259 1,700 1,550 1,889 2,592Depreciation 0 1,735 2,427 2,635 2,942 3,549 3,549EBIT 828 751 1,016 1,436 1,256 1,534 2,237Other Income 90 122 141 83 284 256 292Interest and Finance Charges 21 59 39 27 39 86 86Profit before tax and ExceptionalItems 897 814 1,118 1,492 1,501 1,704 2,444Exceptional Items 0 0 0 0 0 - -Profit before tax 897 814 1,118 1,492 1,501 1,704 2,444Tax 162 169 256 219 184 341 529Profit after tax before minorityinterest 736 645 863 1,273 1,317 1,363 1,914Minorities Interest and others 4.54 4.71 (3.00) - - - -Reported net profit 731 640 866 1,273 1,317 1,363 1,914 (Rs mn)Four-S Research 27
  • 28. Company Report: Zensar Technologies 23 Aug’11Balance SheetBalance Sheet FY07 FY08 FY09 FY10 FY11 FY12E FY13EShareholders EquityShare Capital 239 240 240 216 433 433 433Reserves and Surplus 2,138 2,600 2,346 3,081 4,027 5,386 7,231ESOPs - - - - - - -Total equity capital 2,377 2,840 2,586 3,297 4,460 5,819 7,664LiabilitiesSecured Loans 885 639 757 447 2,363 2,363 2,363Unsecured Loans - - - - - - -Minority Interest 1 7 3 - - - -Deferred Tax Liability 5 8 5 2 16 - -Total Liabilities and OwnersEquity 3,267 3,486 3,351 3,745 6,839 8,182 10,027AssetsGoodwill on consolidation - - - - - - -Gross Block 563 2,317 2,019 2,128 5,480 5,489 5,489 Less: Depreciation 542 702 904 1,106 2,007 2,367 2,722Net Fixed Assets 21 1,615 1,115 1,022 3,473 3,122 2,767Capital Work in Progress 128 295 59 14 52 70 100Investments 204 160 237 151 256 309 400Current AssetsInventory - - - - 836 836 836Debtors 1,304 1,443 1,333 1,426 2,295 2,471 2,821Cash and Bank Balance 448 376 811 1,300 1,100 1,368 3,199Other Current Assets - - 535 439 536 726 925Loans and Advances 297 379 526 726 1,445 1,441 1,536Total Current Assets 2,049 2,198 3,205 3,891 6,211 6,841 9,316Current Liabilities 1,047 1,063 1,046 1,016 2,970 18,523 21,150Provision 102 116 281 357 411 5,799 7,107Total Current Liabilities 1,149 1,179 1,327 1,373 3,380 24,322 28,257Net Current Assets 899 1,019 1,878 2,518 2,831 44,091 64,910Deferred Tax Asset 45 48 63 40 227 272 270Total Assets 1,297 3,136 3,351 3,745 6,839 8,182 10,028 (Rs mn)Four-S Research 28
  • 29. Company Report: Zensar Technologies 23 Aug’11 Cash Flow StatementCash Flows FY07 FY08 FY09 FY10 FY11 FY12E FY13ENet Profit/(Loss) before Tax 745 814 1,118 1,492 1,501 1,704 2,444Depreciation 153 174 243 263 294 355 355Dividend Income (12) (9) (13) (15) (9) (12) (12)Interest Expense 21 59 39 27 39 86 86Loss / (Profit) on Sale of Investments(net) (0) (0) (1) (0) - - -Interest Income (19) (10) (10) (12) (15) (13) (12)Loss / (Profit) on Sale of Fixed Assets(net) (2) 0 (0) 1 (0) - -Operating Cashflow before Wcap 886 1,028 1,375 1,756 1,802 2,119 2,860Sundry Debtors (474) (121) 144 (104) (123) (176) (350)Inventories - - - - (43) - -Other Current Assets (86) (69) (153) 93 (78) (191) (199)Loans and Advances (70) (40) (52) 1 77 (4) (95)Current Liabilities and Provisions 332 4 147 (37) 560 (948) 393Cash Generated from Operations 588 802 1,461 1,708 2,194 801 2,610Direct Taxes Paid (163) (178) (411) (313) (788) (341) (529)Operating Cashflow- A 425 624 1,049 1,395 1,406 459 2,080Cash Flow from Investing ActivitiesPurchase of Fixed Assets including CWIP (1,205) (351) (678) (158) (273) 43 70Purchase of business - (28) - - (3,054) - -Sale Proceeds of Fixed Assets 3 9 125 1 1 - -Purchase of Investments in Mutual Funds (1,138) (999) (3,107) (3,416) (2,608) - -Sale Proceeds of Investments in MutualFunds 1,070 1,044 3,030 3,502 2,512 - -Interest Income 19 10 10 12 12 - -Dividend Income 12 9 13 15 9 - -Cash from Investing activities- B (1,239) (306) (605) (44) (3,401) 43 70Cash Flow from Financing ActivitiesShares bought back - - - (400) - - -Shares allotted under ESOP - - - 5 11 - -Secured Loans taken / (repaid) 734 (237) 137 (314) 1,916 - -Interest Payment (21) (59) (39) (27) (30) (30) (30)Dividend on Equity Shares and taxthereon (69) (98) (107) (126) (138) (154) (218)Proceeds from issuance of Share Capitalonexercise of stock options 5 3 - - - (51) (72)Cash from Financing activities- C 700 (391) (8) (863) 1,759 (234) (319)Change in Cash= A+B+C (114) (72) 435 488 (236) 268 1,831Group, Inc. as on the 1st January, 2011 - - - - 36 - -Opening Balance 562 448 376 811 1,300 1,100 1,368Closing Balance 448 376 811 1,300 1,100 1,368 3,199 (Rs mn) Four-S Research 29
  • 30. Company Report: Zensar Technologies 23 Aug’11RatiosRatios FY08 FY09 FY10 FY11 FY12E FY13EPer share numbers (Rs)EPS 26.72 36.12 58.98 30.37 31.4 44.1CEPS 26.06 43.78 64.65 32.41 10.6 48.0DPS 3.80 4.50 5.50 3.49 4.5 5.3Profitability RatiosEBITDA margin 11.8% 13.9% 17.8% 13.6% 12.1% 14.5%Pretax margin 10.4% 12.3% 15.7% 13.2% 10.9% 13.7%Net margin 8.2% 9.5% 13.4% 11.6% 8.7% 10.7%ROE 24.5% 31.9% 43.3% 34.0% 26.5% 28.4%ROCE 22.3% 29.8% 40.5% 23.8% 20.4% 24.6%Growth RatiosRevenue growth 29.2% 16.0% 4.9% 19.5% 37.1% 14.2%EBITDA growth 11.7% 36.1% 35.0% -8.8% 21.8% 37.2%Net profit growth -9.2% 37.3% 33.4% 3.5% 3.4% 40.5%Activity/Turnover Ratios(x)Asset turnover 3.5 4.2 4.3 3.9 3.4 2.8Working Cap turnover 8.2 6.3 4.3 4.3 4.3 3.3Debtors turnover 5.7 6.5 6.9 6.1 6.5 6.7Debtor Days 64 56 53 60 56 54Payables turnover 7 9 9 6 6 9Payables Days 49 42 39 64 56 41Liquidity Ratios (x)Current Ratio 1.9 2.4 2.8 1.8 2.8 3.3Cash Ratio 0.3 0.6 0.9 0.3 0.6 1.1Solvency Ratios (x)Debt Equity 0.2 0.3 0.1 0.5 0.4 0.3Leverage Ratio 1.1 1.3 1.1 1.5 1.4 1.3Net Debt / EBITDA 0.3 0.0 -0.5 0.8 0.5 -0.3Interest Coverage 12.7 26.2 52.6 32.5 17.9 26.1Four-S Research 30
  • 31. Company Report: Zensar Technologies 23 Aug’11About Four-S ServicesFour-S Services provides customised business and financial research to organizations across the globe. Thecompany also provides Investor Relations consulting to corporates based on in-depth sectoral and companyresearch. The company has an impressive client profile and a team of analysts covering the key sectorsincluding Finance & Banking, IT & Telecom, Retail, Media & Entertainment, Pharmaceuticals, Infrastructureand Manufacturing amongst others. For further information on the company please visit www.four-s.comDisclaimerThe information contained herein has been obtained from sources believed to be reliable but is notnecessarily complete and its accuracy cannot be guaranteed. No representation, warranty, guarantee orundertaking, express or implied, is made as to the fairness, accuracy or completeness of any information,projections or opinions contained in this document or upon which any such projections or opinions havebeen based. Four-S Services Pvt. Ltd. will not accept any liability whatsoever, with respect to the use of thisdocument or its contents. This document has been distributed for information purposes only and does notconstitute or form part of any offer or solicitation of any offer to buy or sell any securities. This documentshall not form the basis of and should not be relied upon in connection with any contract or commitmentwhatsoever. This document is not to be reported or copied or made available to others.The company may from time to time solicit from, or perform consulting or other services for, any companymentioned in this document.For further details/clarifications please contact:Alok Somwanshi Ajay JindalAlok.somwanshi@four-s.com Ajay.jindal@four-s.comTel: +91-22-42153659 Tel: +91-22-42153659Four-S Research 31

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