Annual Report - Zensar Technoligies - 2009-2010

ZENSAR TECHNOLOGIES LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

Your Directors are pleased to present their 47th Annual Report together
with the Audited Accounts for the year ended 31st March 2010.

Zensar Technologies

Zensar Technologies

India Economy, Zensar Technologies, Geometric Software, HT Media, Indian Bank, Patel Engineering, Voltamp, Alembic, Petronet LNG

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India Economy, Zensar Technologies, Geometric Software, HT Media, Indian Bank, Patel Engineering, Voltamp, Alembic, Petronet LNG

Zensar Technologies

Zensar Technologies

Zensar Technologies, Aztec, Subex , DCHL, Suzlon Energy, Voltamp, Thermax, Shoppers' Stop

Zensar Technologies, Aztec, Subex , DCHL, Suzlon Energy, Voltamp, Thermax, Shoppers' Stop

Zensar Technologies

Zensar Technologies

UTI Bank, TCS, Zensar

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs725
Current market price: Rs645

Price target revised to Rs725

Result highlights

• UTI Bank's Q1FY2008 profit after tax (PAT) was slightly lower than our expectations of Rs188 crore at Rs175 crore, up 45.2% year on year (yoy). The PAT was lower than expected due to higher than expected operating expenses during the quarter.
• The net interest income (NII) was up by 38.8% to Rs446.8 crore compared with our estimate of Rs471 crore. UTI Bank's reported net interest margin (NIM) expanded by four basis points yoy but declined by 34 basis points quarter on quarter (qoq). A sequential fall in the NIM was expected as the bank had invested in low yielding priority sector securities. However, the sequential increase in the cost of funds has been sharp which has resulted in a lower than expected NII.
• The bank has again reported a robust growth, with assets up by 49% yoy and 8% qoq, driven by a strong advances growth of 60% yoy and 12% qoq. The deposits have grown by 45% yoy and 3.9% qoq with an improvement in the current and savings account (CASA) ratio on a year-on-year (y-o-y) basis.
• The non-interest income was up 70.8% yoy and 13.7% qoq to Rs342.3 crore, much above the expectations of Rs273 crore mainly driven by a higher trading income of Rs70 crore, which grew by 346% yoy and 64% qoq. The core fee income was up 67.6% yoy.
• The operating expenses were up by 76% yoy to Rs421.2 crore mainly driven by higher staff expenses, which reported an 85.6% y-o-y and 66.3% sequential growth.
• Although UTI Bank has grown at a robust pace in the last couple of years, yet there are no alarming signs of any deterioration in its asset quality. The net non-performing asset (NPA) level (as a percentage of its net customer assets) improved to 0.59% from 0.61% in Q4FY2007.
• UTI Bank has announced its plan to come out with a follow-on public offer (FPO) for 7.43 crore equity shares (26.3% of its existing equity base) to raise around $1 billion. We have assumed the FPO price to be Rs600 per share, up from Rs550 assumed earlier (as the minimum or floor price for the FPO has been decided at Rs575 per share). This would help the bank to raise around Rs4,459 crore.
• The NIM normally dips for the bank in the first quarter and then gradually picks up. The fee income, business growth and asset quality remain healthy, hence there is no major concern for the bank on the operational side. The capital raising would allow the bank to grow for the next three years without any further dilution. We feel UTI Bank has excellent growth potential which coupled with its strong management and earnings quality should allow it to trade at a slightly higher than its historical book value (BV) valuation band of 2.5-2.7x, as all the parameters that decide the valuations have improved considerably. At the current market price of Rs645 the stock is quoting at 20x its FY2009E earnings per share (EPS), 8.9x its FY2009E pre-provisioning profits (PPP) and 2.4x its FY2009E BV. We maintain our Buy recommendation on the stock with a revised price target of Rs725 at which level it will trade at 2.74x FY2009E BV.

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,128

Price target revised to Rs1,425

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 1.1% quarter on quarter (qoq) and 25.5% year on year (yoy) in its consolidated revenues to Rs5,202.8 crore during Q1FY2008. The sequential revenue growth was largely driven by a 7.6% volume growth in the international business and a 2.2% improvement in the billing rates and employee productivity. On the other hand, the appreciation in the rupee adversely affected the revenue growth by 6.4% on a sequential basis.
• The earnings before interest and tax (EBIT) margin declined by 250 basis points to 23.1% sequentially, largely due to the adverse impact of the rupee's appreciation (an impact of 258 basis points) and wage hikes (an impact of 208 basis points). On the other hand, the improvement of 220 basis points in the billing rates and productivity gains limited the decline in the margins. The operating profit declined by 9% qoq to Rs1,199.9 crore.
• The other income jumped by 68.9% qoq and 129.8% yoy to Rs151.6 crore. If the one-time income of Rs66.3 crore from the stake sale in SITEL is excluded from the other income of Q4FY2007, the other income has leapfrogged by 545.5% on a sequential basis. The jump in the other income component was aided by the gain of Rs107 crore on the foreign exchange (forex) cover during the quarter.
• The high other income and lower tax rate (due to a write-back of Rs29.3 crore of provision made earlier) enabled the company to report a 3.5% quarter-on-quarter (q-o-q) and a 34% year-on-year (y-o-y) growth in its consolidated earnings (adjusted for one-time items) to Rs1,156.2 crore.
• In terms of the outlook, the company doesn't give any specific growth guidance. However, it re-iterated that the demand environment continues to be robust and the gross employee addition would be higher than 32,462 reported in FY2007 (11,000 gross additions in Q2). The TCS management also expects to maintain the net margins on a full year basis, in spite of the steep appreciation in the rupee and the aggressive salary hikes in FY2008 (12-15% for the offshore employees and around 3% for the onsite employees). The loss at the operating level due to the pressure on the margins is expected to be offset by a higher other income resulting from the gains on the forex cover.
• The key operational highlights of Q1 are: (1) an addition of 54 clients; (2) a healthy mining of the existing client base in terms of a robust jump in the number of clients in all categories over the annual revenue run rate of $1 million; (3) a sequential growth of 4.3% in the revenues from the Top 10 clients (in spite of the adverse impact of the rupee appreciation); (4) the attrition rate in the information technology (IT) service business at a comfortable level of 11%; and (5) the closure of one large deal worth over $100 million and three deals of over $20 million each. On the flip side, there has been a slowdown in the sequential growth of revenues from the manufacturing industry vertical and global consulting practice.
• To factor in the exchange rate assumption of Rs40 for FY2008 and FY2009, we have revised down the FY2008 and FY2009 earnings estimates by 2.5% and 3% respectively. We maintain the Buy call on the stock with a revised price target of Rs1,425 (around 23x FY2009 earning per share [EPS]).
  

Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs330

Q1FY2008 results: First-cut analysis

Result highlights

• Zensar Technologies has announced a 9.7% quarter-on-quarter and 36.4% year-on-year growth in its consolidated Q1FY2008 revenue to Rs187.9 crore. The same is slightly lower than our estimates.
• However, the performance was disappointing on the margin front. The operating profit margin (OPM) plummeted by over 450 basis points to 9.7% on a sequential basis. The gross profit margin (GPM) declined by around 300 basis points due to the negative impact of wage hikes and appreciation of the rupee. The sequential increase of 19.8% in the selling, general and administration expenses to Rs34.5 crore further added to the 150-basis-point decline in the margin at the operating level. We suspect that the company could have also been affected by a one-time item related to the integration of the recently acquired ThoughtDigital or the setting up of a development centre in Poland during the quarter. Consequently, the operating profit declined by 25.3% quarter on quarter (qoq) and 8.9% year on year (yoy) to Rs18.2 crore.
• In line with the operating profit, the consolidated earnings also declined by 22% qoq and 8.6% yoy to Rs13.4 crore, which is much lower than our expectations of Rs15.8 crore for the quarter.
• At the current market price the stock trades at 10.1x FY2008 and 7.8x FY2009 earning estimates. We maintain our Buy call on the stock and would come out with a detailed update after the investor conference call tomorrow.

Sharekhan Investor's Eye dated June 18, 2007

Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs342

Zen(sar) and the art of growing

Key points

• Strengthening its portfolio of service offerings: Zensar Technologies (Zensar) has effectively utilised the inorganic route to gain the required critical mass in the fast growing enterprise solutions segment (through the acquisition of OBT Global and ThoughtDigital), to strengthen its footprint in under-penetrated geographies such as Japan (through joint venture with Eza, Japan), and to gain access to marquee clients.
• Maintaining the growth momentum: Zensar is well poised to report a healthy growth of over 40% in FY2008. It is witnessing a strong traction in its organic business and the incremental revenues of Rs110 crore from the recent inorganic initiatives would only add to the overall growth momentum in its revenues. Consequently, even after factoring in the adverse impact of the rupee appreciation, the company is expected to achieve its stated revenue guidance of Rs850 crore in FY2008.
• Margins are sustainable: Zensar is also expected to buck the general declining trend in margins in FY2008. That's because some of its relatively new businesses of ITS and BPO that have been in the investment mode are expected to show a substantial improvement in their margins. It also has other margin levers like a favourable revenue mix and lower overhead costs to cushion against the adverse impact of wage hikes, the appreciation in the rupee and the consolidation of the relatively lower-margin revenues of ThoughtDigital.
• Key concern of stake sale by Fujitsu has been dispelled: The acquisition of the entire stake of Fujitsu in Zensar by the RPG group has eliminated a key concern that was a drag on the stock's valuations.
• Attractive valuations: At the current market price the stock trades at 10.6x FY2008 and 8.2x FY2009 estimated earnings; the valuations are extremely attractive considering the estimated earnings growth of 33% CAGR over FY2007-09. We recommend Buy on the stock with a price target of Rs484.

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STOCK UPDATE

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs918

Preferred play on insurance boom

Key points

• India's largest private sector lender ICICI Bank plans to raise Rs20,125 crore ($5 billion) through a follow-on public offer (FPO). The FPO is to be equally distributed in the domestic and foreign markets. The FPO would remain open from June 19- 22, 2007 and the offer price band is at Rs885-950 with a Rs50 discount offered to retail bidders. Further issue details are provided on next page.
• The bank's management has indicated that the pace of growth in the economy as well as the bank's business in the past few years is unprecedented and the FPO tries to address the increased capital requirements of the bank for the next three years.
• The life insurance sector has been growing at a scorching pace for the past few years and ICICI Prudential Life Insurance is the private sector leader with a 30% market share among the private players and a 10% market share in the overall insurance market. The insurance sector is considered to be a sunrise sector and currently there are no listed insurance companies to play on the boom in the insurance sector. Hence, ICICI Bank, which has a 74% stake in ICICI Prudential Life Insurance, remains our preferred choice to play on the insurance story.
• In the past the bank has had to divert a significant amount of the capital raised through its earlier issues to fund its insurance subsidiaries. However this time we feel the difference is that ICICI Bank has already made arrangements for continuous funding of its insurance businesses. Thus with the funding of the insurance businesses taken care of, we feel, there will be more capital available to the bank to grow its core banking business without frequent dilutions in future. However, the huge FPO would take its toll on the return on equity (RoE), which is expected to come down to 10.3% and 10.5% in FY2008 and FY2009 respectively from 13.3% in FY2007.
• We feel one of the concerns pertaining to the bank revolves around its subsidiary ICICI Financial Services (IFS). The formation of the subsidiary is still in the conceptual stage and the bank has only received a firm commitment of Rs2,650 crore for a 5.9% stake sale. To fully materialise and be executed in black and white from the conceptual stage the deal would require regulatory clearance from the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA) and Foreign Investment Promotion Board (FIPB).
• We feel the stock will continue to consolidate around the current levels, as has been the case in the past after the announcement of any equity issuance. This provides a good opportunity to buy the stock. At the current market price of Rs918, the stock is quoting at 20.1x its FY2009E earnings per share (EPS), 8.9x its pre-provision profits (PPP) and 2.0x FY2009E book value (BV). We maintain our Buy recommendation on the stock with the price target of Rs1,173.
  

Sharekhan Investor's Eye dated June 18, 2007

Sharekhan - Zensar Tech

Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs342

Zen(sar) and the art of growing

Key points

• Strengthening its portfolio of service offerings: Zensar Technologies (Zensar) has effectively utilised the inorganic route to gain the required critical mass in the fast growing enterprise solutions segment (through the acquisition of OBT Global and ThoughtDigital), to strengthen its footprint in under-penetrated geographies such as Japan (through joint venture with Eza, Japan), and to gain access to marquee clients.

• Maintaining the growth momentum: Zensar is well poised to report a healthy growth of over 40% in FY2008. It is witnessing a strong traction in its organic business and the incremental revenues of Rs110 crore from the recent inorganic initiatives would only add to the overall growth momentum in its revenues. Consequently, even after factoring in the adverse impact of the rupee appreciation, the company is expected to achieve its stated revenue guidance of Rs850 crore in FY2008.

• Margins are sustainable: Zensar is also expected to buck the general declining trend in margins in FY2008. That's because some of its relatively new businesses of ITS and BPO that have been in the investment mode are expected to show a substantial improvement in their margins. It also has other margin levers like a favourable revenue mix and lower overhead costs to cushion against the adverse impact of wage hikes, the appreciation in the rupee and the consolidation of the relatively lower-margin revenues of ThoughtDigital.

• Key concern of stake sale by Fujitsu has been dispelled: The acquisition of the entire stake of Fujitsu in Zensar by the RPG group has eliminated a key concern that was a drag on the stock's valuations.

• Attractive valuations: At the current market price the stock trades at 10.6x FY2008 and 8.2x FY2009 estimated earnings; the valuations are extremely attractive considering the estimated earnings growth of 33% CAGR over FY2007-09. We recommend Buy on the stock with a price target of Rs484.
  

Sharekhan - Zensar Tech

Emkay - Phoenix Lamps, Zensar Technologies, Denso India

Emkay - Phoenix Lamps, Zensar Technologies, Denso India

Edelweiss - Zensar Technologies - Conference Call Transcript 25th April-07

Edelweiss - Zensar Technologies - Conference Call Transcript 25th April-07

KRC - Zensar Tech

KRC - Zensar Tech

Zensar Technologies: Hold

Investors can retain their exposure in the Zensar Technologies (Zensar) stock. At the current market price, the stock trades at a price-earnings multiple of 13 times its consolidated 2006-07 per share earnings.

It may be advisable for investors to consider an entry into the stock only on weakness linked to the broad market. We have a `buy' call outstanding on the stock at Rs 213 made in end- September 2006.

The company's strengths stem from its broad-based portfolio of service offerings, robust client additions, scope for acquisition-led growth and reasonable growth potential from these levels. However, as a mid-cap stock, Zensar's valuation may be influenced by its high client concentration, prospects of slowdown in IT spending in the US later this year and slower-than-expected shift in offshoring by its new clients (both organic and inorganic).

Key variables

Zensar's performance in 2007-08 is likely to be dictated by the following variables:

Broad-based portfolio: Zensar operates five business segments — Application portfolio management (APM), enterprise application services (EAS), innovative technology solutions (ITS), business process outsourcing and optimisation (BPO) and consulting services. APM has been the company's key contributor, accounting for 53 per cent of its revenues and 83 per cent of its profit before interest and tax (PBIT) for 2006-07 announced recently.

However, over the past year, the contribution from EAS has risen significantly to 28 per cent of revenues (from 21 per cent in the previous year), while PBIT share has more than doubled to 26 per cent (from 21 per cent in the previous year).

This trend is also reflected in the PBIT margin, which improved for EAS to 13.5 per cent in 2006-07 from 6.7 per cent in the previous year. The PBIT margin from APM also improved by two percentage points to 22 per cent for 2006-07. While the company has staged a turnaround in its contribution from BPO, its share from consulting services, the new segment added this year, has been fairly healthy.

The only disappointment has been the contribution from the ITS segment, whose revenues have also dipped from the previous year, and it has also incurred operating losses. This segment offers services that range from application modernisation, embedded systems, product engineering services and legacy migration.

Client mining: While the top ten clients of Zensar account for 69 per cent of revenues for the year ended March 31, 2007 (up from 60 per cent in the previous year), the company is well-placed to mine its existing clients in different areas.

For instance, it has increased the number of clients in the $1 million-$5 million bracket to five in 2006-07 from three in the previous year. This also reflects its long-standing client relationships with the Mark and Spencer, National Grid, Credit Suisse, Cisco, among others.

In addition, of the 236 active clients, 222 are below $0.5 million, and this offers ample opportunity for scale-up of select clients in the coming quarters.

Inorganic growth: Over the past quarter, the company has put through two key growth initiatives. One, it has acquired the US-based ThoughtDigital Inc. through its US subsidiary for an all-cash consideration of $24.9 million.

ThoughtDigital specialises in Oracle implementation, with clients in the communication, financial services and media space. It had reported revenues of $27 million for the year-ended December 2006.

It is expected to strengthen Zensar's presence in the enterprise applications space. Two, it recently entered into a 60:40 joint venture with the Tokyo-based software company, EZA.

This is likely to help Zensar get a foothold in the niche areas of media and entertainment in the Japanese market.

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ZTL, in which RPG Group now holds 70% stake, is all set for robust growth in future. It is likely to end FY 2007 with revenues of Rs. 580 crore (+) and Net profit of Rs. 54-55 crore, as against earlier guidance of Rs. 550 crore sales and PAT of Rs. 50 crore. For FY 2008, company expects Rs. 850-910 crore revenues (minimum Rs. 850 crore) and PAT % of 10% (i.e. PAT of Rs. 85-91 crore). Beyond that, company is placed to give 30-35% growth p.a. for next 2-3 years :-

© Under First Source Strategy, ZTL will be grooming small to medium sized companies (sales <>

© With recent acquisition of ThoughtDigital in USA ZTL has become among the top10 Oracle practicers in world and 6 largest in India. ZTL is now very well placed to leverage ThoughtDigital acquisition with its marquee customers and back-end outsourcing from India. Company’s deep knowledge in Oracle Practices over the years should help in capitalizing tremendous growth opportunities here (generally services around Oracle package is at 2-3 times the original license fee) and launch of global brand – thought Digital in this space. Company intends to increase its head count from present 1,000 to 3,000 over next 2-3 years in Oracle practice. Oracle has selected ZTL as the exclusive partner for 2 manufacturing segments – auto ancillary and Hitech Discrete manufacturing for North America.

Having acquired thorough knowledge in retail vertical thru ERP implementation for RPG Retail, ZTL has built EPR on its own for dairy business (Ist time in India and likely to tie up with Mother Dairy), which has huge potential.

© ZTL’s niche business segment of Innovative Technology Solutions has now reached an inflexion point with major upscaling expected going forward. Company expects revenues of US $ 100 million from this by FY 2010 (US $ 28 million in FY 2007). Reusability of framework tools and components developed here over the years (a type of products) should enhance productivity at ZTL since very little customization is required. These tools can also be effectively used in new clients under global outsourcing, thereby cutting down man power.

© JV with Japanese company EZA, which has presence in the niche areas of Media & Entertainment and SIP providing Zensar opportunity of Technology / Knowledge transfer. EZA has good customer base and ZTL can leverage this for growth in Japan. In fact top 3 gaming companies of the world are ZTL’s clients.

© BPO – Home Depot is the largest customer in BPO segment. In a way, Home Depot is FTO in BPO. ZTL is the only company rendering BPO services to Home Depot and that too in core area of supply chain. In fact FTO to also help in scaling up BPO business in niche areas with basic infrastructure already being there.

© Decline in attrition rate by 3% in FY 2007 with core managerial team continuing to be in place.

Thus, it is set for robust growth with incubation gestation now over in respect of Enterprise Application Practices and Innovation Technology Practices.

At CMP of Rs. 240/-, share is trading at 10.4 times FY 2007 expected EPS of Rs. 22/- and 6.6 times FY 2008 expected EPS of Rs. 37/-. In view of above mentioned factors, we recommend to “BUY” the share at CMP notwithstanding somewhat adverse perception for RPG group in the market with good possibility for re-rating the stock.

Kotak - Zensar + Weekly Tech Update

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