We initiate coverage on Zensar with a BUY rating for a 20% upside. We believe the business refocusing underway since the CEO change in 3QFY16 is nearing completion. ZENT is positioning itself as a challenger to the scale players in clients with significant IT spend (7/15 of the Top 20/Top40 clients are Fortune500 companies). While this may constrain margins and/or DSOs in the near term, the potential revenue upside could be significant, in our view. ZENT also appears attractively placed in Digital (44% of 2QFY19 revenues) with selective but scale presence in areas such as Oracle and Guidewire implementation services. Momentum is also picking up in the Cloud-centric large deals with $400mn TCV won over 1HFY19 and a 25% YoY jump in the deal pipeline in 3QFY19. We estimate these could drive 12% USD revenue and 16% EPS CAGR over FY19-21 on stable margin assumptions; EPS CAGR could be higher if the planned divestment of the MVS business comes through by 4QFY19. Return ratios/cash-conversion that weakened due to recent acquisitions should also get aligned to the industry average by FY20. Thus, at 0.8x PEG and 20% average discount to peers, we find risk-reward attractive. Client concentration high exposure to retail vertical are the key risks.
There has been a visible pick-up in large deal wins over the last 6 quarters — with $400mn TCV won in 1HFY19 alone 0ù including at-least two $100mn deal wins. Importantly, the wins are also in new logos — such as the $79mn/7-year deal from the City of San Diego and $100mn/five-year deal from a Fortune100 technology firm — indicating the refreshed management/large deal perusal teams are becoming productive. We estimate large deals won over 1QFY18-2QFY19 to give USD 55mn incremental revenues in FY20.
