Zensar Technologies (NSE: ZENSARTECH)

What's priced in?

CMP: 221.65/share.

I maintain a pretty concentrated portfolio (8-15 stocks) and tend to be fully invested. Given the current climate, I’ve freed up some cash (now 20%) while the rest remains invested. I like to think I’m invested in stocks that provide good risk/reward but I’m always screening for better opportunities which I know are out there. In the event of a crash, many might pop up that offer better returns for the risk taken and I’ll rollover my positions into them. In that case, Zensar Technologies might be a prime candidate for a rollover since it’s IT focused, not my forte and has a large portion of its revenues coming from America. So keep that in mind.

With that out of the way, onto the analysis.

About the Company

Zensar Technologies is part of the $4 Billion RPG Group. It is a leading engineering and technology solutions company that conceptualises, designs, engineers and manages digital products and experiences for high-growth companies that are scale-ready and cloud-native. It services 147 clients globally.

The main verticals it services are Hi-tech and Manufacturing (48.7% of revenues), Banking & Insurance (31% of revenues) and Retail & Consumer Services (15.6% of revenues). United States, Europe and the rest contribute roughly 70%, 18% and 12% of revenues resepctively.

Financials & Some Ratios

The company had its best year to date in FY22 with revenues standing at 4200cr, EBITDA at 790cr and PAT at 416cr. Though it sounds good, the company didn’t experience the same growth that its comparables of similar market cap managed to achieve in the same period.

3 year average revenues, EBITDA and PAT stand at 4070cr, 670cr and 325cr respectively. These are the highest 3 year averages in the companies history.

Looking at TTM, all these numbers have fallen off slightly, barring revenues. This is largely a result of higher operating expenses shrinking margins due to increased salaries and higher rates of attrition. It is likely that these factors will play a role in the coming quarters and will be exacerbated in the event of a recession.

At the current market price, the company trades at roughly 1.2x FY22 revenues, where it has historically traded at an average of 1.55x revenues in the last 5 years not counting 2020 (COVID year). Including 2020, it traded at an average 1.4x revenues.

It currently trades at just 8x 3-year average OCF, where the average has been 18x OCF over the last 5 years (including 2020 when it went for just 2.8x OCF).

The company trades at an EV/EBIT of 8.45, the 5 year average being roughly 11.5. This, compared to other companies of similar market capitalisation in the same sector that presently go for EV/EBITs of 12 and higher

The company has had positive free cash flow since at least 2010.

Cash and equivalents stands at around 25% of market capitalisation and has negative net debt. The company’s Graham number (Derived as a function of the company’s EPS and BVPS) is 222, and is the highest price a defensive investor should pay for a particular stock.

Thesis

Let’s get to the reasons I’m investing. For a company to be a good investment, it has to pass certain criteria -