Zensar Technologies (Zensar) has reported a better performance for Q1FY2010 especially on the margin front.
Consolidated revenues grew by 6.7% sequentially to Rs229.2 crore in Q1FY2010. The growth in the topline was driven by a volume growth of 2.5%, a favourable currency impact of 2% and higher realisation during the quarter.
The company announced a programme to buy back its shares for the value up to Rs40 crore at a price not exceeding Rs165 per share.
The promoter of the company has shown his intention to participate in the buy-back programme and this could bring down the promoter’s stake by ~2%. This development is likely to weaken the sentiments towards Zensar.
In terms of the demand environment, the company expects a recovery in January 2010, in line with the management commentary from the other information technology (IT) companies.
In terms of verticals, the company continues to see challenges in the financial services and retail verticals, going forward.
On the other hand, the company is witnessing traction in the insurance, utility, energy and health care verticals. In fact, the company won one large deal aggregating $17 million in the insurance vertical during the quarter.
We have fine-tuned our earnings estimates to reflect the better performance in Q1FY2010 and the improvement in the margin.
Consequently, we have revised our earnings estimates upward to Rs41 per share for FY2010 and to Rs43.6 per share for FY2011.
Though the better performance in Q1FY2010 and the stability in the demand environment call for the re-rating of Zensar’s valuation multiples, we believe the company’s recent announcement about the promoter participating in the buy-back programme could act as a drag on the stock’s valuation in the near term.
Hence, we maintain our HOLD recommendation on the stock with a revised price target of Rs175.
At the current market price, the stock is trading at 3.5x FY2010 earnings estimate and 3.3x FY2011 earnings estimate.