We spoke to Dr. Ganesh Natarajan, Vice-Chairman and CEO of Zensar, recently to update ourselves on the latest industry and company-specific developments.
The company has already seen the benefits of the Impact Outsourcing initiative which it had started earlier this calendar.
According to the Management, the company has already won a few deals based on this initiative including a deal in the UK market. We understand that, the UK and other European markets are experiencing significant weakness.
Zensar has several reputed customers in US and Europe, which are witnessing challenging times. Among these large accounts, the company has agreed to price renegotiation with its largest customer.
We expect average realizations from this customer to be about 5 - 6% lower WEF 4QFY09. This may impact the overall average realizations of the company.
We share the company’s concerns that the situation continues to be challenging. Challenges have emerged in the enterprise applications business with both, SAP and Oracle related licensing and implementation business facing a slowdown.
We believe that, in case the economic situation worsens, there will be a further impact on client budgets. Discretionary work, development work and other high - end services are the areas that could be most at risk.
Thus, there can be further project delays and cancellations too. On the other hand, infrastructure management, transaction processing BPO, Business Intelligence etc are the areas which are expected to be least impacted.
Outlook and valuation
We largely maintain our earnings estimates. We have assumed the rupee to appreciate to Rs46 by 4QFY10. We expect Zensar to achieve revenues of Rs9.58 billion in FY09 and Rs10 billion in FY10.
While volumes are expected to rise by about 6%, expected billing rate pressures and rupee appreciation are expected to impact revenue growth.
EBIDTA margins are expected to be almost flat as gains from higher offshore content and better resource utilization should set off the impact due to salary increases and expected rupee appreciation.
Higher revenues from value added services are also expected to restrict the impact on margins. Consequently, PAT is expected to be almost flat in FY10 at Rs849 million; an EPS of Rs35.4.
We have done our DCF analysis wherein we have assumed a lower profit growth in FY10 and FY11 (due to higher tax rates).
We have also incorporated a higher WACC of about 14% to compensate for the higher risks. We arrive at a fair price target of Rs149 for the stock.