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Zensar: will high returns continue?

For it to keep giving outsized returns, the company needs to crack the digital code and gain considerable scale in the space

Zensar Technologies Ltd turned out to be a terrific investment for private equity fund Electra Partners. Including dividends, the value of its investment rose by about 19 times, generating an annual return of 18% over an 18-year period. Now, Apax Partners has bought Electra’s 23.2% stake in Zensar for around 860 crore. Will it be as successful and can investors expect similar high returns going forward?

Apax, for one, is certainly confident about Zensar’s prospects. Shashank Singh, managing director and head of Apax Partners India, says his firm is bullish generally about the prospects of information technology (IT) services, but also particularly likes Zensar’s strength in the manufacturing and retail verticals, as well as its focus on the digital opportunity. In the past two years, revenue from digital and e-commerce solutions has risen from just 3% of total revenues to 13%. About a year ago, the company acquired a leading partner of Oracle in the e-commerce space to bolster its offerings in the segment.

Investors have clearly liked what they’ve seen in the past couple of years, with the company’s shares rising by about 3.3 times since October 2013. But for the company to continue providing outsized returns, it’s imperative that it is able to crack the digital code and gain considerable scale in the space. Singh adds that a partnership with Apax will open the doors for Zensar to its other portfolio companies. In the case of iGate, he says, the total contract value of deals from these portfolio companies amounted to around $150 million.

All told, the Apax deal looks like a good development for Zensar. It’s also worth noting that about six months ago, Apax had successfully exited its investment in iGate, with reported returns of about 3.7 times on its 2011 investment. As pointed out earlier, whether it can repeat its success with its latest Indian tech investment will depend on how far Zensar can go with its digital offerings.

Mark to Market writers do not have positions in the companies they have discussed.

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