Zensar report

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 in
Nifty 4949 November 2010 makes Zensar among the leaders in infrastructure management
52 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 regularly
Bloomberg ZENT.IN
than most IT midcaps.
NSE Code ZENSARTECH
We believe Zensar can rerate toward higher end of peer group valuations, offering
BSE Code 504067
strong returns over a two year period.
Equity Shares 43.37
(m) A free cash flow generating company
Face Value 10
(Rs) Zensar generated free cash of over Rs 2 bn over FY8-10. This allowed it do its largest
Market 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, EBITDA
1 week -6.61 -1.39 and net profit over FY08-11. Its revenues grew 12% over FY08-11, compared to a
1 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 FY11-13
6 month -22.81 -9.24
1 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, and
Promoters 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 a
Bodies Corporates 2.46 likely price of Rs 230 by March 2013. This implies a return of 80% absolute, or
Others 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.
FY'09 FY'10 FY'11 FY'12E FY'13E
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

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 Zensar
transformatory strongly in the infrastructure management (IM) space. Akibia had a topline of
deal $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 of
fastest 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 not
Verticalisation will have had incentive to push say an IM solution. Now, with a top-down
allow 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.

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Market ignoring strengths in the business
Not a me-me-too in Zensar’s valuations seem to suggest that the market thinks its business
everything 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 Practice
Among the leading Zensar is among the key players in India in Oracle delivery. It has more than
Oracle shops in 1,200 associates dedicated to this practice.
India, ahead of Having executed over 500 projects, Zensar's 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 Practice
Akibia puts Zensar The Akibia acquisition was meant to be transformatory for Zensar’s IM
among the best IM practice. With this acquisition, Zensar would count as among the leaders in
shops the IM space amongst midcap IT.

Ability to handle large clients
Zensar has A large customer relationship is both a positive and a risk. The positive part
successfully is certainly the demonstrated ability to deal with a large relationship. Cisco is
handled Cisco a more than $100mn account for Zensar. While in the last few months the
relationship 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 process
World class Zensar is the world's first enterprise-wide SEI CMM Level 5 Company. This
processes 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.

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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 -260
Zensar has among 5 KPIT 911 549
the better cash flow 6 Mastek* 1,294 1,379
performances 7 Mind Tree 1,939 1,532
amongst 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 June

Fancied 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 free
have poor cash cash flows. This means they are still buyers of growth. 3i has done dozens of
flow 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 growth
Cash flows-M&A We believe this is a strategy which can lead to sustainable growth – generate
an important free cash, do a focussed acquisition to plug portfolio gaps and enhance
growth strategy growth rates. The trick here is to maintain a tight leash on operating cash
flows, and do acquisitions judiciously.

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Some peers have Simple as it sounds, this is not something all that easy to implement, if you
frittered 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
9.0
Zensar has 8.0
7.0
superior debtor 6.0
collections 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.

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ROCE (%)
45.0
40.0
35.0
Zensar scores in 30.0
capital 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 client

Zensar 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 sensitive
Cisco. This year, to performance of CISCO and its decisions regarding IT expenditure. With
business from Cisco CISCO undergoing structural changes and facing budget cuts, Zensar may not
could 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 Risk
While Zensar has Revenues for Zensar are mostly in foreign currency, making Zensar highly
managed currency sensitive to currency movements. Zensar is already looking to diversify its
well, 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.

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Peer Benchmarking
The peer set: midcap IT companies
Zensar is squarely With a market capitalisation of around Rs 5.55 bn, Zensar is a midcap IT
placed in the middle company. The table below gives key headline data for the midcap IT space. As
of the midcap IT can be seen, sales, EBITDA and PAT for Zensar place it close to the midpoint
universe 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 CAGRs
3 year CAGRs for The key factor to note in the above table is the 3 year CAGR ratios for sales
Zensar are above and net profit. On each of those counts, Zensar fares as much or better than
peer averages peer averages.

Profitability: Sustainable strong profits
Profitability better Zensar has been able to maintain good profitability across last few years. Its net
than 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.

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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 23.6

While Akibia deal While large cap IT companies are sitting on cash hoards, midcap IT companies
has pushed up debt, have struggled with debt. Not so for Zensar. While it currently does not have a
in general Zensar cash hoard due to the recent acquisition, its debt situation is at least far more

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has 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 FY11
Subex 0.68 0.50 0.61 0.06 0.02
Sonata 1.23 1.65 1.78 0.20 0.25
Infinite 1.33 1.53 0.61 0.10 0.20
Mastek 1.74 2.88 2.85 0.61 1.24
3i Infotech 2.92 2.53 4.41 0.65 0.32
NIIT 1.17 2.06 2.54 0.40 0.65
Geometric 2.29 2.59 2.94 0.57 0.21
KPIT 1.38 2.39 3.05 0.59 0.81
Mindtree 1.52 1.79 2.47 0.12 0.15
Polaris 2.16 1.67 1.76 0.42 0.41
Infotech Enterprise 2.66 2.80 3.77 1.28 1.08
Rolta 3.25 3.77 4.53 0.50 0.21
Industry Average 1.8 2.18 2.61 0.46 0.46
Zensar 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) Ratios
Company P/E EV/ EV/Sales Sales NP D/E ROCE ROE
EBIDTA
Less valued midcaps
Subex 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%

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3i 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 midcaps
KPIT 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 0.78
Enterprise 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 companies
Low PE IT Let’s see the business ratios of the low PE set. As a group, their sales have
midcaps have low grown at a CAGR of 4% over FY08-11, while their net profit has grown at
growth 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 vastly
midcaps 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 Rs
Governance quality
100 in April 2005. In more than 6 years of trading since then, the company has
questionable in
some 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 companies
High PE midcap The P&L and balance sheet ratios are starkly different for high PE midcap IT
companies have companies. These have grown sales at a 3 year CAGR of 12% versus 4% for

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better 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 the
quality 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.

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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 Target
Zensar should hit a The average discount the better performing set is getting is a PE of just less
price of Rs 250 by than 9x based on historical values. Assigning a 15% growth rate to this set, the
March 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 of
towards 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 an
midcaps expected share price of Rs 230 for March 2013.

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Zensar’s Business
Getting a grip on Zensar’s business model
Valuation suggest The market discounting for Zensar’s business model would seem to imply that
market negative on it is a totally commodity business model, perennially working under severe
Zensar’s price pressure; or the business is already past the maturity phase, into what
fundamentals 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 build
unaware 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 Oracle
strength
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.

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Is it in the numbers?

Zensar’s superior Whatever be the story, an analyst will ultimately seek evidence in the
margins suggest the numbers. So, for a mid-cap IT company, what number can show something
business is better about how commoditised the business is?
than what the EBITDA margin is one relevant number to look at. If the business has no
market 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 the
growth is in single sector, and the company.
digits, smart Net sales have grown at a CAGR of 17% over FY07-11. While some of the
acquisitions have growth has come through acquisitions, the expanding operating margins, years
allowed double of positive cash flow and manageable debt show the business is enhancing
digit 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 the
that small IT firms future of India’s IT services business as a whole. The issue here is – do
will start to midcap IT companies have a role anymore, or is it a game only for the big
degrow. 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 still
Large IT firms are
projected to grow. So what the stock market is saying this – large IT
looking for larger
clients. 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 their
market open for
own growth rates at 20-30%.
midcap IT
While this may very well happen, but current evidence does not point to that.

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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 active
clients continues to clients, and average business/client. When these numbers start showing a
increase. 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 about
fears 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 model
Zensar has biffed The Zensar management implemented two big developments at the end of
up 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 Zensar's addressable market
and growth potential.
Akibia deal With this acquisition, Zensar will expand its potential market and growth
transforms opportunity in not only infrastructure segment but will help in providing
Zensar’s position in mission critical solution. This acquisition helps Zensar to use combined and
the 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.

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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 part
reflection of Akibia of the topline only for Q4. FY12 will see the full integration of Akibia
revenues 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 is
organic 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 of
Zensar is now acquisition, and 325 employees. With a revenue run rate of about
among 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 of
Cross selling Zensar in Asia and Akibia in the US. So Zensar can sell Akibia to this
opportunities 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.

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Verticalisation: More focus, more expertise, deeper relationships

Verticalisation: 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 than
contributing
segment 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 while
SDS, NCR, looking very aggressively to increase share in other appealing segments like
Netgear, Activision, aerospace & defence and automotive. Zensar has been providing various
Fujitsu 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 business
accounts 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.

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Looking for Engineering and PLM is one gap in Zensar’s ability to cater to the
acquisition in US manufacturing vertical. Zensar aims to plug this gap through an acquisition in
and India US/Europe in the medium term.

Zensar has also developed their own IP like Autozenics and NExchange along
Developing 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 within
Autozenics
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

RTB

Expecting rise in Zensar provides range of services in this sector from implementation to
top line by cross- consulting, process outsourcing, maintenance, infrastructure and testing across
selling with Akibia various sub-sectors like Retail Banking, Private Banking & Wealth
customers 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$55-60mn
Fintech Top 100 in revenue from existing US$45mn in FY11. Zensar plans to achieve this
2 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 and

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support projects which give Zensar assured annuity business.

Till now Banking and Financial services vertical was more focused on
The vertical expects emerging market with 90% business coming from this market. Zensar is aware
of the need to derisk geographically; accordingly the vertical would devote
strong cross selling
more attention to revenues from developed markets. This will also help
opportunities with
Akibia 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 Insurance
Zensar has a built The insurance vertical predates the current round of organisation wide
good expertise in verticalisation. Zensar had created this vertical in 2008, recognising the need
insurance 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 has
Africa 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.

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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 European
Providing entire market which makes ~60% of total revenue, Zensar is looking to capture
gamut of services much bigger pie in this segment by expanding in other territories. Zensar is
from professional keeping focus on mid size segment and aggressively pursuing opportunity in
advisory to IT their strong domains like Speciality, Groceries and Department providing their
strategy, BI and expertise services like BI & analytics, AMS & Web 2.0, IM, and Package
retail 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 Multi

Four-S Research 20


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-10
The switch to ICD- remediation. The US healthcare industry needs to transition to ICD-10 by 1
10 presents a big October 2013. By this date, ICD-10 codes must be used on all Health
opportunity in Insurance Portability and Accountability Act (HIPAA) transactions, including
healthcare 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.

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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.
Geographical
diversification 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 sales
in 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 up
US 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 World

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Historical Geographical Revenue Break
12000

10000

Focus on seeking 8000
growth in new Rest of the World
6000
markets. Europe
4000
USA
2000

0
FY'07 FY'08 FY'09 FY'10 FY'11
Rs in mn

Hedging Territory Zensar’s pursuit to hedge the geographical risk is also evident with new emerging
Risk 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 base
Zensar has been The company caters to clients all over the world providing end to end services to
trying 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

FY'10 64%
54%

FY'11 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 FY'07 FY'08 FY'09 FY'10 FY'11
Top 5 client 55% 43% 44% 49% 46%
Top 10 client 69% 51% 52% 60% 54%

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Financial Analysis and Growth Outlook
26% CAGR for revenue expected during FY’11-13
4 year revenue The Company’s net revenues grew at a CAGR of 17% over FY’07-’11 to Rs
CAGR 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 mn

Over FY11-13, The top line however is expected to grow at CAGR of 26% over FY’11-13 on the
Zensar will grow back of current acquisition of Akibia, which will add an incremental Rs 3.5bn to
faster than in Zensar’s top line for FY12. Further organic and inorganic growth is expected to
FY08-11 boost revenue of Zensar to reach Rs 19bn by FY13.

Revenues Growth

18000
16000
14000
Growth driven by
12000
Akibia acquisition
10000
and inorganic
8000
growth
6000
4000
2000
0
FY'09 FY'10 FY'11 FY'12E FY'13E
Rs in mn

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Segment Performance
Zensar divides GTS (Global Transformation Services) and EAS (Enterprise Application
business into 2 key Services) are the major service offerings from Zensar which constitute 65% and
parts: GTS and 24% of revenue to Zensar, respectively. Data Centre, Network & Security
EAS 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 Transformation
GTS and EAS 7,000 Services (GTS)
6,000
constitute major 5,000
portion of Zensar’s Enterprise Application
4,000
Services (EAS)
revenue. 3,000
2,000
1,000 Data Centre, Network &
Security Services (PSI
0
Holdings)
FY'07 FY'08 FY'09 FY'10 FY'11
Rs in mn

Strong 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 Rs
segment 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
FY'07 FY'08 FY'09 FY'10 FY'11
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.

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Margins expected to improve after initial dip
Margins may dip Zensar has managed to increase EBITDA at the impressive CAGR of 19% from
this year due to FY08 to FY11. Zensar has shown strong financial discipline and bottom line
Akibia acquisition focus by maintaining EBITDA margin above 13% in FY11 reaching as high as
and 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 1,000
growth of 19% 800
8%
CAGR in last five 600
400 4%
years. Even better
200
growth 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 at
CAGR of 28% in 500 5%
last 3 years
0 0%
2008 2009 2010 2011

Reported net profit Net margin
Rs in mn

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Financial Annexure

Profit & Loss Statement
Income Statement FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
Revenue from Operations 6,059 7,829 9,081 9,528 11,383 15,607 17,820

Employee Cost 3,995 5,401 6,133 6,212 7,416 10,712 11,974
Other Operating Expenses 525 581 614 567 668 1059 1209
Sales, Admin & General
Expenses 680 887 1,034 1,000 1,596 1,873 1,960
Miscellaneous Expenses 29 35 42 49 152 74 85
Total Expenses 5,230 6,904 7,822 7,828 9,833 13,718 15,228
EBITDA 828 925 1,259 1,700 1,550 1,889 2,592
Depreciation 0 1,735 2,427 2,635 2,942 3,549 3,549
EBIT 828 751 1,016 1,436 1,256 1,534 2,237
Other Income 90 122 141 83 284 256 292
Interest and Finance Charges 21 59 39 27 39 86 86
Profit before tax and Exceptional
Items 897 814 1,118 1,492 1,501 1,704 2,444

Exceptional Items 0 0 0 0 0 - -
Profit before tax 897 814 1,118 1,492 1,501 1,704 2,444
Tax 162 169 256 219 184 341 529
Profit after tax before minority
interest 736 645 863 1,273 1,317 1,363 1,914
Minorities 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)

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Balance Sheet

Balance Sheet FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
Shareholder's Equity
Share Capital 239 240 240 216 433 433 433
Reserves and Surplus 2,138 2,600 2,346 3,081 4,027 5,386 7,231
ESOPs - - - - - - -
Total equity capital 2,377 2,840 2,586 3,297 4,460 5,819 7,664
Liabilities
Secured Loans 885 639 757 447 2,363 2,363 2,363
Unsecured Loans - - - - - - -
Minority Interest 1 7 3 - - - -
Deferred Tax Liability 5 8 5 2 16 - -
Total Liabilities and Owner's
Equity 3,267 3,486 3,351 3,745 6,839 8,182 10,027
Assets
Goodwill 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 2,722
Net Fixed Assets 21 1,615 1,115 1,022 3,473 3,122 2,767
Capital Work in Progress 128 295 59 14 52 70 100
Investments 204 160 237 151 256 309 400

Current Assets
Inventory - - - - 836 836 836
Debtors 1,304 1,443 1,333 1,426 2,295 2,471 2,821
Cash and Bank Balance 448 376 811 1,300 1,100 1,368 3,199
Other Current Assets - - 535 439 536 726 925
Loans and Advances 297 379 526 726 1,445 1,441 1,536
Total Current Assets 2,049 2,198 3,205 3,891 6,211 6,841 9,316
Current Liabilities 1,047 1,063 1,046 1,016 2,970 18,523 21,150
Provision 102 116 281 357 411 5,799 7,107
Total Current Liabilities 1,149 1,179 1,327 1,373 3,380 24,322 28,257
Net Current Assets 899 1,019 1,878 2,518 2,831 44,091 64,910
Deferred Tax Asset 45 48 63 40 227 272 270
Total Assets 1,297 3,136 3,351 3,745 6,839 8,182 10,028

(Rs mn)

Four-S Research 28


Cash Flow Statement
Cash Flows FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
Net Profit/(Loss) before Tax 745 814 1,118 1,492 1,501 1,704 2,444
Depreciation 153 174 243 263 294 355 355
Dividend Income (12) (9) (13) (15) (9) (12) (12)
Interest Expense 21 59 39 27 39 86 86
Loss / (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 2,860
Sundry 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) 393
Cash Generated from Operations 588 802 1,461 1,708 2,194 801 2,610
Direct Taxes Paid (163) (178) (411) (313) (788) (341) (529)
Operating Cashflow- A 425 624 1,049 1,395 1,406 459 2,080
Cash Flow from Investing Activities
Purchase of Fixed Assets including CWIP (1,205) (351) (678) (158) (273) 43 70
Purchase 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 Mutual
Funds 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 70
Cash Flow from Financing Activities
Shares 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 tax
thereon (69) (98) (107) (126) (138) (154) (218)
Proceeds from issuance of Share Capital
on
exercise 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 1,831
Group, Inc. as on the 1st January, 2011 - - - - 36 - -
Opening Balance 562 448 376 811 1,300 1,100 1,368
Closing Balance 448 376 811 1,300 1,100 1,368 3,199

(Rs mn)

Four-S Research 29


Ratios
Ratios FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
Per share numbers (Rs)
EPS 26.72 36.12 58.98 30.37 31.4 44.1
CEPS 26.06 43.78 64.65 32.41 10.6 48.0
DPS 3.80 4.50 5.50 3.49 4.5 5.3

Profitability Ratios
EBITDA 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 Ratios
Revenue 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 2.8
Working Cap turnover 8.2 6.3 4.3 4.3 4.3 3.3
Debtors turnover 5.7 6.5 6.9 6.1 6.5 6.7
Debtor Days 64 56 53 60 56 54
Payables turnover 7 9 9 6 6 9
Payables Days 49 42 39 64 56 41

Liquidity Ratios (x)
Current Ratio 1.9 2.4 2.8 1.8 2.8 3.3
Cash Ratio 0.3 0.6 0.9 0.3 0.6 1.1

Solvency Ratios (x)
Debt Equity 0.2 0.3 0.1 0.5 0.4 0.3
Leverage Ratio 1.1 1.3 1.1 1.5 1.4 1.3
Net Debt / EBITDA 0.3 0.0 -0.5 0.8 0.5 -0.3
Interest Coverage 12.7 26.2 52.6 32.5 17.9 26.1

Four-S Research 30


About Four-S Services
Four-S Services provides customised business and financial research to organizations across the globe. The
company also provides Investor Relations consulting to corporates based on in-depth sectoral and company
research. The company has an impressive client profile and a team of analysts covering the key sectors
including Finance & Banking, IT & Telecom, Retail, Media & Entertainment, Pharmaceuticals, Infrastructure
and Manufacturing amongst others. For further information on the company please visit www.four-s.com

Disclaimer
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necessarily complete and its accuracy cannot be guaranteed. No representation, warranty, guarantee or
undertaking, 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 have
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For further details/clarifications please contact:
Alok Somwanshi Ajay Jindal
Alok.somwanshi@four-s.com Ajay.jindal@four-s.com
Tel: +91-22-42153659 Tel: +91-22-42153659

Four-S Research 31

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