Digital Services Propel Zensar’s Q2 Growth to 1,240 Cr

Company Name: Zensar Technology Lyd | NSE Code: ZENSARTECH | BSE Code: 504067 | 52 Week high/low: 578/202 | CMP: INR 519 | Mcap: INR 11,751 Cr | PE: 22.4

Company Overview:

Zensar Technology, a member of the RPG group, specializes in providing IT services and solutions. The company’s offerings encompass experience services, advanced engineering services, data engineering and analytics, application services, and foundation services. Zensar focuses on industry verticals such as Hitech & Manufacturing, Consumer Services, Banking & Financial Services, and Insurance.

Business Segment: Digital Application & Digital Foundation Services

Digital Application services contribute 81.8% to the company’s revenue, including custom applications management services spanning development, maintenance, support, modernization, and testing across various technologies and industry verticals. Digital Foundation services make up the remaining 18.2%, offering infrastructure management services through a managed service platform employing automation, autonomics, and machine learning.

Moderate Revenue as Hitech and Healthcare Verticals Decline

The revenue exhibited stability, experiencing a marginal 0.5% year-over-year (YoY) growth and a more notable 1.11% quarter-over-quarter (QoQ) increase, reaching 1,240 Cr. This performance was influenced by a slowdown in sectors like Hitech and Healthcare. Notably, Banking and Financial Services demonstrated a robust sequential QoQ revenue growth of 3.1% and an impressive quarterly YoY growth of 7.8% in constant currency.
On the other hand, Manufacturing and Consumer Services showcased a noteworthy sequential QoQ growth of 6.7%, but experienced a slight quarterly YoY decline of 0.7% in constant currency. In contrast, Hitech and Healthcare encountered challenges, with an 8% QoQ decline (-16.9% YoY) and a 1.5% QoQ decrease (-4.7% YoY) respectively.

Geographical Revenue Breakdown in Q2FY24

South Africa experienced a 7.9% QoQ growth in constant currency, contributing 12.2% to total revenue. UK/EU exhibited an 11.3% QoQ growth, representing 21.6% of total revenue. The USA, despite being the major contributor at 66.2%, reported a 4.3% QoQ decline in revenue.

Client Concentration Risk Reduction

In Q2FY24, the top 5 clients accounted for 31.5% of total revenue, compared to 34.6% in Q2FY23. Similarly, the contribution of the top 10 clients decreased from 45.5% in Q2FY23 to 42.2% in Q2FY24, and the top 20 clients contributed 58.3% in Q2FY24 compared to 60.7% in Q2FY23. This indicates a decline in revenue concentration among the top clients, suggesting a positive trend for revenue growth.

Services Performance in Q2

On a QoQ basis, Advanced Engineering Services recorded a growth of 7.8%, Experience Services grew by 3.1%, Application Services and Enterprise Application Services grew by 0.2%, while Foundation Services remained flat. Data Engineering and Analytics experienced a decline. These key service lines collectively constituted 34.0% of total revenues.

Valuation and Key Ratios

Currently, the stock trades at a multiple of 22.4x earnings per share (EPS) (TTM) of 23.2 Rs, with a market price of 519 Rs. The company’s stock is valued at 3.63 times its book value of 144 Rs per share. In EV/EBITDA, the company ranks 7th with a multiple of 12.53x, compared to the industry median of 17.37x. The trailing twelve-month return on equity (ROE) and return on capital employed (ROCE) stand at 11.2% and 14.5%, respectively. The interest coverage ratio is robust at 28.4x, indicating the company’s solvency.

Q2FY24 Result Update: Consolidated

➡️In Q2FY24, revenue remained moderate, growing 0.5% YoY (+1.11% QoQ) to 1,240 Cr due to the slowdown in the Hitech and Healthcare verticals.

➡️EBITDA surged 119.07% YoY (+0.35% QoQ) to 230 Cr, driven by a decline in operating expenditure. The EBITDA margin expanded significantly by 1000 bps YoY to 18.61%.

➡️Operating profit (EBIT) increased by 245.73% YoY (+3.46% QoQ) to 194 Cr, with an EBIT margin jumping by 11.1% YoY and 36 bps QoQ to 15.66%.

➡️Profit after tax (PAT) saw a remarkable surge of 206.16% YoY (+11.3% QoQ) to 174 Cr, and the PAT margin expanded by 940 bps YoY and 130 bps QoQ to 14.02%.

➡️Earnings per share (EPS) for the quarter stood at 7.69 Rs, compared to 6.91 Rs in the previous quarter.

Conclusion

Zensar Technology reported stable Q2FY24 results with a 0.5% YoY revenue increase, despite challenges in Hitech and Healthcare sectors. The company demonstrated resilience in diversified geographical and client revenue streams. Notable growth in EBITDA, operating profit, and PAT reflects operational efficiency, contributing to positive market valuation and improved financial ratios.

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