Zensar Technologies: Should you buy the stock after September quarter earnings? Here's what brokerages say

Shares of Zensar Technologies, a mid-sized IT services company and part of the RPG Enterprise Group, dropped 5.6% to ₹519.25 apiece during Wednesday's trade after the company posted its Q2 FY24 earnings.

The company posted a consolidated net profit of ₹174 crore, a 205% surge compared to ₹57 crore posted in Q2 FY23. On a QoQ basis, net profit showed an 11.53% increase, while revenue growth remained relatively flat, with a slight YoY uptick of 0.5% and a QoQ increase of 1.1% to reach ₹1,240 crore.

Within its business segments, Banking and Financial Services reported a QoQ revenue growth of 3.1% and a YoY growth of 7.8% in constant currency. Manufacturing and Consumer Services reported a QoQ growth of 6.7% and a YoY decline of 0.7% in constant currency.

Hitech reported a QoQ decline of 8.0% and a YoY decline of 16.9% in constant currency. Healthcare and Life Sciences reported a QoQ decline of 1.5% and a YoY decline of 4.7% in constant currency, according to the company's earnings report.

Following the company's Q2 performance, domestic brokerage firm Equirus Securities noted that Zensar's increasing focus on execution is yielding positive results. The company's margins continue to exceed expectations, which bodes well for a turnaround in sales growth and enhances Zensar’s capability to strike a balance between growth and margins.

Also, the rich experience and pedigree of the newly appointed CEO can potentially change the growth profile over the long term. Towards this, Zensar had already started making a strong push towards client mining and hunting efforts with the creation of a strong leadership team, the brokerage said. 

However, in the near term, like peers, Zensar is also witnessing demand headwinds with slower client decision-making and measured IT spending due to tough macro conditions, it added. 

Considering these factors, along with the consistent positive surprises in 2HFY23 and 1HFY24 and the consistent improvement in services growth rate (excluding hi-tech segment sales), the brokerage maintains its 'LONG' rating on Zensar Technology with a target price of ₹622 apiece.

On the other hand, Nuvama Institutional Equities maintained its 'HOLD' rating on the stock with a 12-month target price of ₹520 apiece.

"Zensar continued to surprise positively on margin, although the last two quarter’s surprises were partly driven by one-time benefits. We believe margins have peaked out, and most other positives too are priced in."

"Post the strong run-up in stock price, Zensar is currently trading at 18.5x FY25 PE, higher than 10 years’ historical average (12.5x), making the risk-reward unfavourable. Zensar needs to show superior, consistent revenue growth to justify this premium," said Nuvama.

Stock Performance in CY23

The stock staged a remarkable recovery this year after experiencing a substantial 59% drop in CY22. It began 2023 with great momentum, posting an 8.12% gain in January. This positive trend continued into February with a 26% surge, and in May, the stock climbed another 32%. July also saw an impressive increase of 28.54%. These gains collectively contributed to a substantial overall increase of 145% in CY23 so far.