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Zensar Technologies
th
S&P CNX
8,953
CMP: INR1,005
Buy
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
44.6
1136/755
-11/0/14
45.7
0.7
71.0
52.1
Net Sales
EBITDA
PAT
EPS (INR)
Gr. (%)
BV / Sh (INR)
ROE (%)
ROCE (%)
Payout (%)
Valuations
P /E (x)
P / BV (x)
EV/EBITDA
Div. Yield (%)
2016
2017E
2018E
29.6
4.3
3.1
68.2
17.0
314.4
24.0
28.5
17.6
32.2
4.8
3.5
77.0
12.3
373.8
22.3
27.1
21.3
37.2
6.2
4.4
98.0
27.3
448.0
23.9
29.5
20.8
14.8
3.2
10.2
1.2
13.1
2.7
8.3
1.6
10.3
2.2
6.0
2.0
ZENT has been taking several transformation measures post the recent investor and
leadership change. The key ingredients of its strategy are: [1] Focus on Digital, [2]
Attention towards 65 key accounts, and [3] Rejigging presence in Infrastructure
Management (IM) towards Services and Cloud.
While the first two are revenue drivers, the third leg of its strategy is a driver of
margins. Progress in these areas has been substantial, but simultaneous pruning of
low-yield accounts and trimming of the Product business is likely to limit revenue
growth at 5% in FY17.
The churn in the portfolio lays a better foundation for growth beyond FY17, driving
our estimate of 12% revenue growth in FY18. This should be seconded by margin
expansion from scaling up of newer areas and reconstitution of IM portfolio.
Favorable Digital skew: Digital constitutes 27% of ZENTs revenue, amongst the
highest in the industry, facilitated by acquisition of Professional Access (PA). All
segments in Digital grew in the range of 21-37% YoY in FY16, and will continue with
similarly significant contribution to overall growth. PA is the third largest
implementer of Oracle Commerce globally. Its success with large retailers provides
ZENT with marquee clients that can be mined extensively.
limiting pressure on Legacy: On the 77% revenue from Application Services,
strong Digital presence and high proportion of Maintenance revenue have capped
the risk on portfolio from cloud shift of on-site implementation. Less than 20% of
the portfolio is likely to be at risk from cloud migration and smaller deal sizes. Also,
ZENTs bet on the Oracle Cloud ecosystem has been paying off Oracles strides in
SaaS and PaaS are reflected in its 65% YoY growth in these areas.
Promoter
47.94
47.84
47.94
Public
52.06
52.16
52.06
--
--
--
Others
Relative to Index
Zensar Technologies
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ZENT has been going through a portfolio reconstitution since the new investor
and new leadership got on board. While these corrective measures are likely to
be implemented through FY17, the portfolio is likely to be in much better shape
in FY18, enabling industry-leading growth.
The key drivers of this outperformance are going to be: [1] 30% of total revenue
from Digital, [2] Lower exposure to Legacy because of higher Digital,
Maintenance and Cloud revenue (<20% of total revenue), and [3] Reconstitution
of Infrastructure Management (IM) revenue to Services and Cloud (20% of total
revenue).
While Digital has been growing at ~30% YoY, and IMS and Cloud have been
gaining scale, there is a simultaneous pruning of low-yield accounts and
Products business in IM. This has been leading to lower growth in FY17.
However, with this exercise far into implementation by the end of FY17, the
base would be set right for 12% YoY growth in FY18.
4.9
Growth (YoY, %)
12.0
4.9
4.2
(0.7)
(1.7)
389
383
399
427
475
532
FY13
FY14
FY15
FY16
FY17E
FY18E
This would naturally lead to better margins, given better profitability in Digital and
pruning of lower profitability MVS and Products businesses in Infrastructure
Management, and termination of low-yield accounts.
We expect these measures to result in headroom for the company to reinvest into
the business to augment capabilities in newer areas, and sales and marketing
functions. However, once the newer areas gain critical mass, margins are expected
to follow suit.
Take for instance, the IM business. Restructuring is likely to result in flat revenue in
FY17. However, the portfolio is likely to undergo a change to
Services:Maintenance:Products::60:30:10 in FY17 from 40:30:30 in FY16. This is
likely to improve profitability in the IM business from ~5% in FY16 to ~10% in FY17,
and further improvement is likely in FY18, as the MVS business gets on track.
September 2016
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14.9
14.7
99
14.4
52
55
FY16
FY17E
13.9
13.7
(81)
FY13
FY14
FY15
FY16
FY17E
FY13
FY18E
FY14
FY15
FY18E
36%
27%
13%
30%
17%
15%
12%
2,154
1,252
256
122
104
61
59
TCS
WPRO
MTCL
ZENT
PSYS
NITEC
KPIT
In Digital, ZENT has carved out a niche through its focus on eCommerce enablement.
The presence in this area was brought about by its acquisition of Professional Access
(PA) in August 2014. This contributes to half of ZENTs Digital revenue. The
remainder is contributed by Other Digital Services, and the cross-over between
Legacy and Digital.
Betting on success of Oracle Commerce
Oracle Commerce is an eCommerce platform for online retailers, which spans across
multiple channels, and facilitates purchasing transactions. PA is one of the largest
Oracle ATG and Endeca partners in the world (implementation and maintenance). It
is an Oracle Platinum partner with presence in the US, the UK, Latin America, Middle
East and Africa. The company works with several large and mid-sized retailers in
these geographies to build and implement their eCommerce strategies.
September 2016
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Others, 0.3
Maintenanc
e&
support,
46.1
Implement
ation, 53.7
Retail and
telecom,
90.8
Oracle Commerce combines ATG and Endeca two companies Oracle acquired.
ATG's solutions enable enterprises to provide a cohesive online customer
experience with sophisticated merchandising, marketing, content personalization,
automated recommendations, and live-help services. Endeca was recognized as a
pioneer of faceted search, particularly in the context of electronic commerce and
online libraries.
Oracle Commerce has a dominant market share among eCommerce platforms for
online retailers. The other dominant players in the market are IBM WebSphere, SAP
Hybris and Magento. Other players in the market with a lower share include Digital
River, Elastic Path, Apttus and CloudCraze.
Oracle Commerce has seen particularly high success in larger retailers. Some of the
largest retailers using the Oracle Commerce platform are Neiman Marcus,
Walgreens, Macys, Express, CVS, Kohls, Blue Nile, American Eagle, OfficeMax and
Chicos.
Exhibit 5: Oracle Commerce rated highly by Forrester and Gartner
September 2016
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1.2
2014
2019
Source: Forrester
September 2016
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29
34
37
35
25
21
5
Company
Cloud
Design
Digital
B2C
B2B
experience marketing Commerce Commerce
services
Cyber
security
Application
Management
Services, 76%
Source: MOSL, Company
In Application Services (77% of revenue), 33% revenue is derived from the Oracle
ecosystem, of which 37% is Digital. This leaves 63% of the Oracle ecosystem (21% of
total revenue) exposed to Legacy.
In the rest of the Application Services business (44% of revenue), Digital forms ~15%
of total revenue, and assuming Testing and BPO together form ~8%, it leaves an
additional 21% of total revenue exposed to Legacy.
However, ZENT has a strong Maintenance presence (nearly half of the 42%), and has
made significant in-roads in Cloud implementation in its Oracle practice. Effectively,
this leaves less than 20% of total revenue exposed to on-premise implementation.
September 2016
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Application Services
Oracle
Commerce
Legacy
Digital
Legacy
Testing
BPO
Infrastructure Management
Maintenance
Services
Total
Composition (% of
revenue)
77.2%
33.0%
12.3%
20.7%
14.9%
20.5%
4.4%
4.4%
22.8%
8.1%
14.7%
100.0%
Source: MOSL
Moreover, ZENT has been betting big on the Oracle ecosystem (33% of total
revenue), and remains positive on the likelihood of Oracles success in the Cloud.
Revenue from Oracles SaaS and PaaS reached USD690m in 4QFY16, up 66% YoY in
USD terms and 68% CC. Year over year growth rates have steadily increased through
FY16, and Oracle expects the momentum to continue in 1QFY17, wherein its expects
SaaS and PaaS revenue to grow 75-80% YoY.
In FY16, while total revenue for Oracle was down 2% CC to USD37b, SaaS and PaaS
revenue was at USD2.2b, up 52% YoY CC. The companys Executive Chairman and
CTO has mentioned Oracle of having a fighting chance to be the first SaaS and PaaS
company to grow to USD10b in revenue.
The proportion of cloud revenue in ZENTs Oracle piece would see a rapid expansion
of base, and contribute higher to incremental growth as this shift becomes more
rapid and profound at Oracle.
Exhibit 10: Oracles Cloud revenue growth increasing with scale
SaaS and PaaS (USDm)
65.9
56.7
33.8
34.1
1QFY16
2QFY16
3QFY16
4QFY16
Source: MOSL, Company
September 2016
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30%
MVS
Products
10%
30%
30%
40%
IM composition at the end of FY16
60%
ZENTs infrastructure business comprises of (1) MVS and (2) IMS & Cloud, which are
run separately as focused businesses. The company intends to grow its IMS & Cloud
business to 15% of total revenue over the next 12 months. The key focus areas in
this business are:
September 2016
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Services
2%
4%
4%
-2%
-8%
-16%
-13%
1QFY16
-15%
2QFY16
-17%
3QFY16
-21%
4QFY16
1QFY17
Source: MOSL, Company
Maintenance revenue for ZENT mainly stems from the acquisition of Akibia in
November 2010. The proposition was for ZENT to provide total infrastructure
outsourcing and for it to become the single point of contact for all infrastructure
support. The profitability of this business has been hampered because of scale.
The fixed costs in this business are high because of limited manpower requirement,
fixing of the supply chain, and the fact that warehouses are already set up. Any
uptick in revenue would thus result in disproportionate increase in profitability. The
company has recently hired new leadership for this segment, with a head who has
prior experience in turning around a similar business.
All these measures (focus on scaling up Services + reduction of Products +
profitability resurrection in Maintenance) are likely to result in flat revenue in FY17.
However, margins have the potential to improve from ~5% in FY16 to ~10% in FY17,
giving ample room for reinvestments in other parts of the business without hurting
company-level margins.
September 2016
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September 2016
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.
Riding the Digital wave: Digital accounts for 27% of ZENT's revenue and has
been seeing growth of 21-37% YoY. Half of Digital is constituted by eCommerce
implementation, where capabilities have increased post ZENT's acquisition of
Professional Access, which in FY16 grew by 25% YoY. The rest of Digital revenue
comes from other Digital and cross-over services. Moreover, with increased
emphasis on Enterprise Digital and CMO-led solutions, Digital will only get a
further boost from current levels.
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.
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.
Over the last two quarters itself, the number of active customers has come
down to 183 from 217.
Expect rebound in revenue growth: On account of ongoing restructuring, we
expect revenue growth of 5% in FY17. However, with the implementation of
growth engines well in progress, we expect a revival in revenue growth to 12%
in FY18.
Margin comfort for FY17-18E: Revenue growth pick-up, profitability
improvement in the IMS business, and current investments should lead to a
210bp EBITDA margin expansion over FY16-18. EBIT margins in the IMS business
(18% of revenue) can improve from 6% in FY16 to 14% in FY18, 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 150bp. We expect an EPS
CAGR of 20% over FY16-18.
10
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Key triggers
20
Peak(x)
Min(x)
Avg(x)
4.0
14.6
15
11.8
10
Peak(x)
Min(x)
2.5
1.5
1.0
4.9
1.1
Avg(x)
3.1
3.0
2.0
6.1
PB (x)
Median(x)
1.3
0.4
Sep-16
Jun-15
Mar-14
FY16
12.3
27.4
21.0
16.5
28.9
19.0
19.5
24.0
Dec-12
Jun-10
FY18E
12.8
13.0
8.2
11.4
12.4
7.4
12.9
10.2
Sep-11
Mar-09
Dec-07
Sep-06
Sep-16
Jun-15
Mar-14
Dec-12
Sep-11
Jun-10
Mar-09
Dec-07
Sep-06
0.0
Mcap
USD b
Mphasis
1.7
Mindtree
0.6
KPIT Tech
0.4
Cyient
0.8
Hexaware
0.9
NIIT Tech
0.4
Persistent Sys.
0.7
Zensar
0.7
Rating
Neutral
Neutral
Neutral
Buy
Neutral
Neutral
Neutral
Buy
TP
Upside
EPS (INR)
(INR)
(%)
FY16 FY17E FY18E
570
4.8
34.5 38.1 42.4
550
6.8
35.9 29.9 39.6
160
22.1 14.1 13.7 16.0
550
15.5 30.7 34.2 41.6
230
15.0 12.9 13.6 16.1
530
34.5 45.8 41.3 53.4
710
16.0 37.2 37.7 47.4
1,300
30.0 68.2 77.0 98.0
FY16
15.8
14.4
9.3
15.5
15.5
8.6
16.5
14.7
P/E (x)
FY17E
14.3
17.2
9.5
13.9
14.7
9.5
16.2
13.0
RoE (%)
FY17E
12.8
19.9
18.0
16.2
26.7
15.2
17.3
22.3
FY18E
14.0
23.1
17.5
17.4
26.9
17.4
20.0
23.9
September 2016
11
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Story in charts
36%
30
34
37
21
256
122
104
61
59
TCS
WPRO
MTCL
ZENT
PSYS
NITEC
KPIT
Growth (YoY, %)
12.0
14.9
14.7
4.9
4.2
Cyber security
1,252
B2B Commerce
2,154
B2C Commerce
12%
Digital marketing
services
15%
Company
17%
4.9
35
25
30%
27%
13%
29
Design
experience
Cloud
14.4
13.9
13.7
(0.7)
(1.7)
389
383
399
427
475
532
FY13
FY14
FY15
FY16
FY17E
FY18E
FY13
FY14
FY15
FY16
FY17E
Services
4%
2%
FY18E
Growth (YoY, %)
36.1
27.3
-2%
-8%
-16%
-13%
1QFY16
-15%
2QFY16
-17%
3QFY16
-21%
4QFY16
1QFY17
September 2016
17.0
11.4
10.0
12.3
1.7
2.4
2.6
3.1
3.5
4.4
FY13
FY14
FY15
FY16
FY17E
FY18E
12
Zensar Technologies
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Operating metrics
Exhibit 22: Operating metrics
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
75
11
14
75
11
14
76
9
15
78
10
12
78
10
12
74
12
14
75
12
13
78
10
12
75
11
15
Manufacturing
Retail and consumer services
Financial services
Emerging
Service Mix (%)
67
11
21
2
62
14
20
4
56
18
21
6
57
18
21
4
57
20
19
4
54
23
19
4
52
21
20
7
54
24
18
4
54
24
18
4
70
30
12
18
74
26
11
15
72
28
10
18
74
26
10
16
77
23
9
14
78
22
8
14
74
26
8
18
77
23
8
16
77
23
8
15
Fixed price
Time & material
Revenue by delivery (%)
48
52
46
54
52
48
45
55
47
53
50
50
54
46
53
47
50
50
Onsite
Offshore
Client metrics
68
32
67
33
67
33
65
35
65
35
63
37
66
34
64
36
69
31
37
7
44
8
52
38
6
44
8
52
31
8
39
13
52
39
7
46
6
52
38
8
46
10
56
37
10
47
8
55
35
8
43
9
52
38
8
46
10
56
37
9
46
10
56
55
7
2
1
65
9
2
1
73
11
3
1
75
9
3
1
63
4
3
2
64
5
3
2
65
4
4
2
66
5
4
2
65
6
4
2
85
178
19
82
183
10
75
182
18
83
204
14
79
196
24
86
217
19
84
211
26
85
194
18
77
183
21
6,894
695
103
79
15
7,846
742
952
79
12
8,037
709
191
78
12
8,174
573
137
78
13
7,895
1,531
(279)
79
16
8,050
844
155
80
16
8,192
730
142
82
16
8,256
588
64
81
16
8,238
662
(18)
80
18
September 2016
13
Zensar Technologies
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September 2016
FY11
11,383
19.5
7,906
1,948
1,529
13.4
294
39
305
0
1,502
184
12.3
0
1,318
1,318
3.3
FY12
17,825
56.6
12,337
3,224
2,263
12.7
333
93
527
0
2,364
777
32.9
0
1,587
1,587
20.4
FY13
21,145
18.6
14,809
3,444
2,892
13.7
332
100
332
-187
2,606
861
33.0
0
1,745
1,745
10.0
FY14
23,156
9.5
15,957
3,803
3,396
14.7
383
109
290
205
3,399
1,023
30.1
0
2,375
2,375
36.1
FY15
26,277
13.5
18,329
4,307
3,641
13.9
415
112
364
181
3,659
1,013
27.7
-1
2,646
2,646
11.4
FY16
29,643
12.8
20,366
5,015
4,262
14.4
454
106
181
407
4,289
1,169
27.3
-26
3,094
3,094
17.0
FY17E
32,173
8.5
22,440
4,931
4,802
14.9
467
133
337
358
4,896
1,398
28.6
-24
3,473
3,473
12.3
(INR Million)
FY18E
37,242
15.8
25,314
5,773
6,155
16.5
559
129
471
236
6,175
1,729
28.0
-24
4,422
4,422
27.3
FY11
433
4,027
4,460
2,392
6,852
FY12
434
5,325
5,759
2,755
8,514
FY13
436
6,853
7,289
2,353
9,642
FY14
438
9,017
9,455
11
2,032
11,498
FY15
443
11,127
11,570
12
1,396
12,977
FY16
446
13,812
14,258
39
1,878
16,175
FY17E
446
16,420
16,866
39
1,628
18,533
(INR Million)
FY18E
446
19,767
20,213
39
1,378
21,630
5,480
-2,007
3,473
50
744
5,558
246
836
1,876
1,100
916
584
2,973
997
1,682
294
2,585
6,852
6,045
-2,269
3,776
27
583
7,869
468
950
2,911
1,745
1,142
654
3,741
1,337
1,884
521
4,128
8,514
6,341
-2,372
3,969
25
545
8,035
417
1,049
3,354
1,420
856
937
2,931
1,059
1,556
315
5,104
9,642
6,503
-2,287
4,215
21
608
10,015
1,478
1,288
3,581
1,458
817
1,392
3,361
1,507
1,385
468
6,654
11,498
8,201
-2,728
5,474
14
617
11,240
931
1,226
4,539
1,960
880
1,704
4,368
1,305
2,426
637
6,872
12,977
8,889
-3,182
5,706
17
517
13,989
1,016
1,259
5,427
2,823
1,072
2,392
4,054
1,643
2,118
293
9,935
16,175
9,289
-3,649
5,639
13
619
17,887
1,116
1,234
5,891
5,888
1,163
2,596
5,624
2,250
3,000
375
12,263
18,533
9,739
-4,208
5,531
9
721
21,758
1,216
1,326
6,819
8,052
1,346
2,998
6,388
2,555
3,407
426
15,370
21,630
14
Zensar Technologies
th
(INR Million)
FY18E
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
30.5
37.3
103.3
3.5
11.5
36.6
44.2
132.7
7.0
19.1
40.2
47.8
167.9
8.0
20.0
54.7
63.6
217.9
10.1
18.4
61.0
70.5
266.6
11.2
18.4
68.2
78.2
314.4
12.0
17.6
77.0
87.3
373.8
16.4
21.3
98.0
110.4
448.0
20.4
20.8
18.4
14.9
12.5
1.8
4.6
1.0
16.5
15.1
11.5
1.6
3.8
1.1
14.8
11.9
10.2
1.5
3.2
1.2
13.1
6.5
8.3
1.2
2.7
1.6
10.3
4.9
6.0
1.0
2.2
2.0
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
34.0
23.4
39.7
31.1
26.2
22.1
26.7
30.3
24.4
28.4
30.8
25.8
25.2
28.6
25.1
24.0
28.5
24.7
22.3
27.1
26.0
23.9
29.5
33.8
Turnover Ratios
Debtors (Days)
Fixed Asset Turnover (x)
79
3.3
73
4.7
74
5.3
78
5.5
86
4.8
96
5.2
96
5.7
96
6.7
FY11
1,014
392
1,406
-272
1,134
-3,129
-3,401
11
1,886
-138
1,759
36
-200
1,299
-200
1,100
FY12
2,281
-546
1,735
-263
1,472
-190
-452
10
-320
-329
-640
6
649
1,096
649
1,745
FY13
2,212
-1,152
1,060
-334
726
87
-247
16
-776
-379
-1,139
8
-318
1,739
-318
1,420
FY14
2,720
-625
2,094
-323
1,771
-961
-1,284
59
-422
-411
-774
10
46
1,413
46
1,458
FY15
2,823
382
3,206
-372
2,834
-1,448
-1,819
62
-395
-542
-874
0
512
1,448
512
1,960
FY16
3,805
-1,218
2,587
-423
2,164
1
-422
42
-375
-969
-1,302
0
863
1,960
863
2,823
FY17E
4,074
737
4,811
-396
4,415
-102
-498
0
-383
-865
-1,249
0
3,065
2,823
3,065
5,888
September 2016
(INR Million)
FY18E
5,109
-943
4,166
-446
3,720
-102
-548
0
-379
-1,075
-1,454
0
2,165
5,888
2,165
8,052
15
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