BSE SENSEX
31,262
S&P CNX
9,668
Zensar Technologies
CMP: INR869
TP: INR1,020(+17%)
Buy
Active Digital-oriented transformation
Synchronizing demand, offerings, delivery and sales
9 June 2017
Update
| Sector:
Technology
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
ZENT IN
45
1136 / 814
-7/-31/-24
39.1
0.6
34
51.4
Financials Snapshot (INR b)
Y/E Mar
2017 2018E 2019E
Net Sales
30.8
32.8
37.5
EBITDA
3.9
4.3
5.1
PAT
2.5
3.0
3.4
EPS (INR)
54.9
65.5
76.0
Gr. (%)
-19.5
19.3
16.0
BV/Sh (INR)
356.9 407.3 466.7
RoE (%)
16.3
17.2
17.4
RoCE (%)
22.3
21.6
22.8
P/E (x)
15.8
13.3
11.5
P/BV (x)
2.4
2.1
1.9
Shareholding pattern (%)
As On
Mar-17 Dec-16 Mar-16
Promoter
48.6
48.6
47.8
DII
13.4
2.0
0.5
FII
2.7
14.6
14.1
Others
35.3
34.8
37.5
FII Includes depository receipts
Stock Performance (1-year)
Zensar Tech.
Sensex - Rebased
1,200
1,100
1,000
900
800
We attended the RPG Group analyst meet. Key highlights of the meeting with
Zensar Technologies (ZENT):
Duality in the business…:
80% of the incremental dollars are being spent on
Digital by enterprises. While this offers a large opportunity, some headwinds
have been looming over the industry. The decline in the traditional and legacy
business has been steep as customers aim to fund their digital initiatives via
savings in commoditized services.
…evident from performance metrics:
Over the last three years, Digital
recorded a 59% CAGR, constituting 29.8% of revenue in FY17, while Legacy
business declined at a 7.3% CAGR. ZENT expects overall growth to start gaining
momentum once volumes pick-up in Digital is enough to offset pressure on
traditional business. Digital contribution is expected to increase to 35% of total
revenue over next four quarters.
Building products and platforms…:
As Digital gains more relevance, service
providers will have to increasingly build capabilities or buy them. ZENT has built
multiple solutions: [1] The Vinci – a cloud orchestration and managed services
platform, [2] ZenAnalytica – predictive analytics, [3] SmartBlox – blockchain
feasibility assessment, [4] RPA – using bots to automate processes and [5]
Digital Workplace Services.
…and active on acquisitions…:
In FY17, ZENT successfully completed two
acquisitions – Foolproof (leading UK-based experience design agency) and
Keystone (leading omni-channel and Digital supply chain company),
strengthening capabilities in Digital. These acquisitions enabled ZENT to
become an end-to-end provider for CDO/CMO organizations (via Foolproof)
and of omni-channel customer experience from commerce to fulfillment (via
Keystone).
…resulting in improved business mix:
ZENT has seen significant improvement
in Digital and traditional wins over last 12 months, clocking total large deals
worth USD300m. It has had Digital conversations with more than 70% of its top
50 clients, and has been successfully placing Digital evangelists in its top
accounts to further expand the share of these offerings.
Valuation and view:
The business has been undergoing a transformation in
various dimensions (services, customers, sales), resulting in muted overall
growth and drawn-down profitability (led by higher investments and
restructuring). However, we expect a revival in performance from FY19 as the
business gets cleaned up and there is a favorable base to leverage on. For
revenue/earnings CAGR of 10/19%, we maintain
Buy
with a revised price target
of INR1,020—discounting FY19E EPS by 13x.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 6129 1531
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530

Zensar Technologies
30% of revenue from Digital in FY17
Digital contributed 30% of revenue in FY17. In 4QFY17, it exhibited considerable
strength, growing 8.2% QoQ and making up 34% of total revenues. Over the next
four quarters, the company is aiming to achieve 35% of revenue from Digital.
Exhibit 1: Sustained growth momentum in Digital
Digital revenue (USDm)
Growth (QoQ, %)
9.3%
8.2%
4.2%
3.6%
29.9
4QFY16
31.1
1QFY17
32.2
2QFY17
35.3
3QFY17
38.1
4QFY17
Source: MOSL, Company
Living Digital offerings
ZENT has introduced a mobile-first, cloud-enabled, pre-packaged platform that
focuses on making organizations digital, and gives measurable benefits of adoption.
The key pillars of the solutions are:
[1] Engaging Digital; employment engagement solutions increasing employee
satisfaction by 10-15%.
[2] Operating Digital; productivity solutions to improve operating productivity by
15-20%.
[3] Managing Digital; reporting and dashboard leading to 15-20% higher
customer satisfaction.
[4] Partnering Digital; customer engagement solutions accelerating sales by 10-
20%.
Several investments made
Apart from its investments in building solutions and acquiring capabilities, ZENT
has invested in physical infrastructure to aid its Digital strategy. ZenLabs has
been developed to foster innovation and transformation in future technology. It
has invested in Intelligence Command Centre to monitor customer data centers.
The company has also been making an effort to restructure its MVS business,
and incurred one-time expense in the previous quarter. It is hopeful of this
being executed over next few quarters.
It has also actively invested in its sales function, refurbishing teams to
synchronize demand, offerings and sales. In the US, >80% of the team at ZENT is
less than one year old.
Re-skilling of employees has become a crucial aspect as fast-changing
technologies have been increasing the need for adaptation. ZENT has developed
a comprehensive training program for its employees.
Restructuring has weighed upon profitability
In FY17, gross margin contracted 210bp YoY to 29.2%, while EBITDA margin
shrunk 140bp YoY to 12.8%.
9 June 2017
2

Zensar Technologies
EBITDA margin contraction was led by:
[1] Restructuring in the Multi-Vendor Services business
[2] Pricing decline in a few large customers
[3] Exchange rate fluctuations
[4] Project delays leading to lower utilization
[5] Clean-up of debtors in India
[6] Higher composition of revenue onsite
The margin aspiration is for profitability to revive to FY16 levels (14.4%).
Exhibit 2: Restructuring in MVS business took a toll on IMS margins
17.1
17.9
AS EBIT margin (%)
20.4
19.3
19.1
IMS EBIT margin (%)
17.4
19.7
18.2
18.5
17.7
16.2
16.1
4.2
7.6
11.0
10.0
8.6
6.2
13.0
3.5
(4.7)
1.2
4.4
(12.2)
Source: MOSL, Company
Valuation and view
Execution for next leg of growth is in progress:
Post the leadership change at
ZENT, execution has become fast-tracked, with several steps taken toward
realigning the organization with its growth engines. In line with this, several
services/solutions have been launched, sales function has been augmented, and
there is a renewed focus on client mining and large deals. These initiatives are
currently in the investment mode and likely to start adding to growth along with
Digital and IMS.
Digital – the key trigger:
Digital accounted for 30% of ZENT's revenue in FY17,
and has been seeing growth of ~30% YoY. Half of Digital is constituted by
eCommerce implementation, where capabilities have increased post ZENT's
acquisition of Professional Access, which grew 25% YoY in FY16. The rest of
Digital revenue comes from other digital and cross-over services. Moreover,
with an increased emphasis on Enterprise Digital and CMO-led solutions, Digital
will only get a further boost from current levels. The company has further
augmented its presence in Digital with the addition of Foolproof and Keystone,
adding capabilities across user experience and supply chain solutions.
Re-constitution to continue for the better:
ZENT had earlier laid focus on
achieving the Diamond partnership with Oracle. However, elevation from
Platinum partnership is a function of the work around Oracle's installed base,
and not cloud services. Oracle has a managed cloud partner program, on which
ZENT has turned its attention as this better aligns with changing market
dynamics, Oracle's strategy and ZENT's focus areas. Moreover, the realignment
of focus in infrastructure management toward IMS & Cloud too marks a step in
this direction.
9 June 2017
3

Zensar Technologies
Aggressive consolidation of non-core business:
Over the last two years, ZENT
has cut out non-core geographies, verticals and service lines. Since the
leadership change, the company has renewed focus on strategic accounts, and is
in the process of cutting its long tail of low-yield and non-scalable accounts.
Pruning of these accounts has been ongoing for the past six quarters, and is
expected to continue for one more. Current investments are toward
restructuring the sales function in the US and the MVS business.
Expect rebound in revenue growth:
On account of ongoing restructuring, we
expect revenue growth of 7.9% in FY18 (which would also include 2.5% from the
integration of Keystone). However, with implementation of growth engines well
in progress and a clean base to work on, we expect a revival in revenue growth
to 12.6% in FY19.
Margin comfort for FY17-19E:
Revenue growth pick-up, profitability
improvement in the IMS business, and current investments should lead to
reinstatement of profitability over FY17-19E. EBIT margin in the IMS business
(18% of revenue) can improve from 0% in FY17 to company average by FY19, led
by higher revenues from 'IMS and Cloud' and the restructuring in the MVS
business. This alone has the potential to improve overall margins by 200bp.
However, the path has taken a tad longer than earlier because of ongoing
investments. Valuing the stock at 13x FY19E earnings, we maintain our
Buy
rating with a price target of INR1,020.
Key triggers
Broad-based pick-up in revenue growth
Margin improvement despite investments
Significant increase in deal wins and deal pipeline
Key risk factors
Problems in top accounts
Risk from slower spend on ERP
Hindrances in structural recovery of margins
Exhibit 4: 1-year forward P/B band
4.0
3.0
PB (x)
Median(x)
Exhibit 3: 1-year forward P/E band
20
15
10
5
0
PE (x)
Median(x)
Peak(x)
Min(x)
18.7
Avg(x)
Peak(x)
Min(x)
Avg(x)
3.2
6.9
1.1
4.9
12.4
2.0
1.0
0.0
0.4
1.5
1.3
2.1
9 June 2017
4

Zensar Technologies
Story in charts
Exhibit 5: Contribution of Digital to total revenue among the
highest in the industry
Digital revenue (USDm)
36%
30%
17%
20%
5
15%
12%
59
KPIT
Source: MOSL, Company
Digital (% of total revenue)
Exhibit 6: 21-37% YoY growth in all areas of Digital in FY16
FY16 Growth (YoY, %)
29
30
34
37
25
35
21
13%
2,154
TCS
1,252
WPRO
256
MTCL
136
ZENT
69
PSYS
61
NITEC
Source: MOSL, Company
Exhibit 7: Expect revenue growth to pick up
Revenue (USDm)
12.3
4.9
(1.7)
5.4
1.4
7.9
Growth (YoY, %)
12.6
Exhibit 8: …coupled with margin expansion…
14.7
13.7
13.9
13.0
EBITDA margin (%)
14.4
13.6
12.8
389.2
FY13
382.8
FY14
429.7
FY15
452.8
FY16
459.3
FY17
495.7
FY18
558.1
FY19
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 9: …assisted by coming-off of investments…
EBITDA margin (%)
16.4
14.6
14.1 14.4 14.1
15.3 15.5
14.4
12.4
17.5
16.8 16.4 16.6
16.2
18.5
15.3 15.6
16.2
SG&A (%)
18.7
Exhibit 10: Potential for improvement in IMS margins
IMS revenue (INRb)
10.0
7.4
8.2
5.6
IMS PBIT margin (%)
12.6
13.8 14.1 13.8
9.3
4.7
FY13
5.3
FY14
5.3
FY15
5.3
FY16
(0.0)
6.6
FY17
Source: MOSL, Company
Source: MOSL, Company
9 June 2017
5

Zensar Technologies
Operating metrics
Exhibit 11: Operating metrics
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
Geographic Mix (%)
USA
Europe
ROW
Vertical Mix (%)
Manufacturing
Retail and consumer services
Financial services
Emerging
Service Mix (%)
Application Management Services
Infrastructure Management Services
Maintenance
Services
Project Type (%)
Fixed price
Time & material
Revenue by delivery (%)
Onsite
Offshore
Client metrics
Client concentration (%)
Top 5
Top 6-10
Top 10
Top 11-20
Top 20
Client brackets
1 Million dollar +
5 Million dollar +
10 Million dollar +
20 Million dollar +
Other metrics
Repeat business (%)
Number of active clients
New clients added in the period
Employee metrics
Total headcount
Gross employees added during the period
Net employees added during the period
Utilization
Attrition
78
10
12
57
18
21
4
74
26
10
16
45
55
65
35
78
10
12
57
20
19
4
77
23
9
14
47
53
65
35
74
12
14
54
23
19
4
78
22
8
14
50
50
63
37
75
12
13
52
21
20
7
74
26
8
18
54
46
66
34
78
10
12
54
24
18
4
77
23
8
16
53
47
64
36
75
11
15
54
24
18
4
77
23
8
15
50
50
69
31
75
10
15
52
26
18
5
77
23
7
16
50
50
66
34
74
12
14
52
25
19
4
76
24
7
17
47
53
67
33
74
14
13
53
26
17
3
81
19
7
11
47
53
66
35
39
7
46
6
52
75
9
3
1
83
204
14
8,174
573
137
78
13
38
8
46
10
56
63
4
3
2
79
196
24
7,895
1,531
(279)
79
16
37
10
47
8
55
64
5
3
2
86
217
19
8,050
844
155
80
16
35
8
43
9
52
65
4
4
2
84
211
26
8,192
730
142
82
16
38
8
46
10
56
66
5
4
2
85
194
18
8,256
588
64
81
16
37
9
46
10
56
65
6
4
2
77
183
21
8,238
662
(18)
80
18
39
10
49
11
59
69
6
4
2
79
187
16
8,316
730
78
80
16
37
8
45
11
56
71
6
4
2
75
215
41
8,564
750
248
80
16
38
8
46
10
56
72
7
4
3
75
216
11
8,524
573
(40)
79
15
Source: Company, MOSL
9 June 2017
6

Zensar Technologies
Financials and Valuations
Key assumption
Y/E Mar
INR/USD Rate
Revenues (USD m)
Offshore Revenue (%)
Total Headcount
Net Addition
Per Capita Productivity (USD)
2012
48.0
371.0
29.4
7,121
976
52,103
2012
17,825
56.6
2,263
12.7
333
1,930
93
527
0
2,364
777
32.9
0
1,587
1,587
20.4
2013
54.3
389.2
30.0
6,508
(613)
59,805
2013
21,145
18.6
2,892
13.7
332
2,561
100
145
0
2,606
861
33.0
0
1,745
1,745
10.0
2014
60.5
382.8
32.3
6,791
283
56,364
2014
23,156
9.5
3,396
14.7
383
3,013
109
495
0
3,399
1,023
30.1
0
2,375
2,375
36.1
2015
61.1
429.7
33.3
8,174
1,383
52,574
2015
26,277
13.5
3,641
13.9
415
3,226
112
545
0
3,659
1,013
27.7
1
2,646
2,646
11.4
2016
65.5
452.8
35.5
8,256
82
54,850
2016
29,643
12.8
4,262
14.4
454
3,808
106
588
0
4,289
1,169
27.3
26
3,094
3,094
17.0
2017
67.1
459.3
33.2
8,524
268
53,883
2017
30,805
3.9
3,932
12.8
443
3,489
88
153
0
3,554
1,040
29.3
36
2,478
2,478
-19.9
2018E
66.3
495.7
34.0
9,264
740
53,505
2018E
32,841
6.6
4,280
13.0
460
3,820
86
458
0
4,193
1,216
29.0
20
2,957
2,957
19.3
2019E
67.3
558.1
33.5
10,204
940
54,693
2019E
37,535
14.3
5,087
13.6
488
4,599
66
326
0
4,858
1,409
29.0
20
3,430
3,430
16.0
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
(INR Million)
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
434
5,325
5,759
2,755
0
8,514
6,045
2,269
3,776
27
468
7,984
950
2,911
1,745
2,379
3,741
3,221
521
4,243
8,514
2013
436
6,853
7,289
2,353
0
9,642
6,341
2,372
3,969
25
417
8,162
1,049
3,354
1,420
2,339
2,931
2,615
315
5,231
9,642
2014
438
9,017
9,455
2,032
0
11,498
6,503
2,287
4,215
21
1,478
9,145
1,288
3,581
1,458
2,818
3,361
2,893
468
5,784
11,498
2015
443
11,127
11,570
1,396
0
12,977
8,201
2,728
5,474
14
931
10,926
1,226
4,539
1,960
3,201
4,368
3,731
637
6,558
12,977
2016
446
13,812
14,258
1,878
0
16,175
8,889
3,182
5,706
17
1,016
13,490
1,259
5,427
2,823
3,980
4,054
3,761
293
9,436
16,175
2017
446
15,657
16,103
1,628
0
17,770
9,889
3,625
6,263
13
1,116
15,900
1,266
5,908
3,319
5,407
5,522
5,154
368
10,378
17,770
2018E
446
17,931
18,377
1,378
0
19,794
10,339
4,085
6,254
9
1,216
18,185
1,170
6,298
3,733
6,984
5,869
5,477
391
12,316
19,794
(INR Million)
2019E
446
20,612
21,059
1,128
0
22,226
10,789
4,573
6,216
5
1,316
21,355
1,234
7,198
5,294
7,629
6,667
6,223
444
14,688
22,224
9 June 2017
7

Zensar Technologies
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
36.6
44.2
132.7
7.0
19.1
0.0
0.0
0.0
0.0
0.0
31.1
26.2
22.1
2013
40.2
47.8
167.9
8.0
20.0
0.0
0.0
0.0
0.0
0.0
26.7
30.3
24.4
2014
54.7
63.6
217.9
10.1
18.4
15.9
4.0
1.6
10.8
1.2
28.4
30.8
25.8
2015
61.0
70.5
266.6
11.2
18.4
14.3
3.3
1.4
9.9
1.3
25.2
28.6
25.1
2016
68.2
78.2
314.4
12.0
17.6
12.8
2.8
1.3
8.7
1.4
24.0
28.5
24.7
2017
54.9
64.7
356.9
12.0
21.8
15.8
2.4
1.2
9.2
1.4
16.3
22.3
19.3
2018E
65.5
75.7
407.3
12.9
19.7
13.3
2.1
1.1
8.2
1.5
17.2
21.6
19.3
2019E
76.0
86.8
466.7
14.2
18.6
11.5
1.9
0.9
6.6
1.6
17.4
22.8
21.4
73
28
40
0.2
2012
2,263
489
-546
-471
0
1,735
-263
1,472
-190
0
-452
10
-97
-223
-323
-634
649
1,096
1,745
74
26
26
0.1
2013
2,892
70
-1,152
-750
0
1,060
-334
726
87
0
-247
16
-124
-651
-371
-1,131
-318
1,739
1,420
78
29
34
0.1
2014
3,396
375
-625
-1,051
0
2,094
-323
1,771
-961
0
-1,284
59
-120
-302
-401
-764
46
1,413
1,458
86
24
26
0.0
2015
3,641
171
382
-988
0
3,206
-372
2,834
-1,448
0
-1,819
62
-124
-271
-542
-874
512
1,448
1,960
96
23
29
-0.1
2016
4,262
589
-1,218
-1,046
0
2,587
-423
2,164
1
0
-422
42
-109
-266
-969
-1,302
863
1,960
2,823
100
21
37
-0.1
2017
3,932
116
660
-1,040
0
3,669
-996
2,673
-1,206
0
-2,202
0
-88
-250
-634
-971
495
2,823
3,319
99
18
37
-0.1
2018E
4,280
438
-198
-1,216
0
3,304
-446
2,858
-1,426
0
-1,872
0
-86
-250
-682
-1,018
414
3,319
3,733
99
17
36
-0.2
2019E
5,087
306
-808
-1,409
0
3,175
-446
2,729
-104
0
-550
0
-66
-250
-748
-1,064
1,561
3,733
5,294
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
9 June 2017
8

Zensar Technologies
NOTES
9 June 2017
9

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Zensar Technologies
Disclosure of Interest Statement
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No
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No
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