Zensar’s 3QFY10 profits beat our estimates. While revenues were lower than our expectations, EBIDTA margins surprised us positively, though they were lower q-o-q.
The shortfall in revenues occurred largely because of exceptional shut-down by a couple of clients during last week of December. Â New order wins from several existing large accounts and a strong pipeline are encouraging. Billing rate re-negotiations are likely over.
Management indicated an improving macro scenario along with improved standing of Zensar in its focus areas of operations. Company added 7% of previous quarter’s employee base in IT services, indicating higher optimism. This was also the largest number of addition in the past three years.
Currency movements and lower revenues impacted margins during the quarter. The company has completed the buy-back of 10% of its paid-up equity. We could not comment on the stock earlier as an affiliate company Kotak Mahindra Capital was an advisor to the transaction.
We expect EPS of Rs.58.9 for FY10 and Rs.60.9 in FY11 (on post-buyback equity). Â The stock is available at 5x FY11E earnings with cash of about Rs60 per share expected in FY11.
We maintain BUY with a discounted cash flow (DCF)-based price target of Rs.387. Â A prolonged recession in major user economies and a sharper-than-expected appreciation in rupee v/s major currencies are pronounced risks for a smaller player like Zensar.
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