1. C O M P A N Y R E P O R TIndia 23 Aug 2011Zensar Technologies Rs 127Sec tor : ITStrong financials, robust bu siness mixxxxo...BSE Sensex16,498Zensar ended FY11 strongly positioned for growth. The acquisition of Akibia inNifty4949 November 2010 makes Zensar among the leaders in infrastructure management52 week high (Rs) 193 amongst IT midcaps. Zensar has also reorganised its business along focus verticals,52 week low (Rs)125 which will allow it to cross-sell its service capabilities and mine clients better.We believe Zensar now has a robust business model. Besides, it has a better financialrecord than most IT midcaps, including some fancied more by the market. It hasstronger margins, better capital efficiency, and makes free cash flows more regularlyBloomberg ZENT.INthan most IT midcaps.NSE Code ZENSARTECHWe believe Zensar can rerate toward higher end of peer group valuations, offeringBSE Code 504067strong returns over a two year period.Equity Shares43.37(m) A free cash flow generating companyFaceValue10(Rs)Zensar generated free cash of over Rs 2 bn over FY8-10. This allowed it do its largestMarket Cap 5,474acquisition yet, a $66mn (around Rs 3 bn) all cash deal to acquire an IM company in(Rs mn)FY11. With robust operating cash flow going forward, Zensar will have ammo forfurther strategic acquisitions over FY11-13.Share Price Performance (%) Growth better than peer averagesZensarSensexZensar holds its ground against peers in growth rates delivered in revenues, EBITDA1 week-6.61 -1.39 and net profit over FY08-11. Its revenues grew 12% over FY08-11, compared to a1 month-13.63-11.88 peer average of 7.4%. PAT has grown at 25% versus 17% for peers.3 month-27.32 -8.31Growth drivers in place for FY11-136 month-22.81 -9.241 year -26.23-10.38 Zensar made a significant acquisition in FY11, that of Akibia, an IM company. Thiswill add over Rs 3.5 bn to the FY12 topline. More importantly, there is strongopportunity to cross-sell between existing Akibia and Zensar clients. Zensar is also Shareholding Pattern (Jun11)% creating focussed verticals, a move which will help it mine its clients better, andPromoters47.79compete better against peers.FIIs8.02At current price, Zensar quotes at 4.2x FY11 and around 2.8x FY13e earnings,DII 2.52below midcap averages. We rate Zensar at 5.2x expected FY13 earnings, giving aBodies Corporates 2.46likely price of Rs 230 by March 2013. This implies a return of 80% absolute, orOthers 41.68about 50% annualised upside from current levels. Dividend yield is 2.8% onFY11 DPS (despite a 1:1 bonus in FY11); this could rise to 4% by FY13. FY09FY10 FY11FY12EFY13E Sales9,2229,610 11,383 15,607 17,820 EBITDA 1,2591,7001,5501,8892,592 PAT8661,2731,3171,363 1914 EBITDA margin (%) 14 18 14 12 15 Net margin (%)10 13 129 11 ROE (%)32 43 3427 28 ROCE (%) 30 41 2420 25 P/E Ratio (x)2.1 4.64.24.02.9 EV/EBITDA (x)1.4 2.94.63.82.8 Dividend Yield (%)2.83.64.1Rs mn

2. Company Report: Zensar Technologies 23 Aug11 Investment Rationale Came out of FY11 positioned for growth Akibia acquisition a strong growth driver Zensars acquisition strategy is focussed on plugging gaps in its service offerings, designed to give global heft to critical parts of its business. For example, the Thought Digital acquisition catapulted Zensar among the top Oracle shops in India, and added considerable gap over its midcap peers.Akibia a The Akibia deal is a similar transformatory acquisition, positioning Zensartransformatory strongly in the infrastructure management (IM) space. Akibia had a topline ofdeal $108mn at the time of its acquisition, around 40% of Zensars FY11 turnover. With this, Zensar is now amongst top ten players in IM space in India. Akibia revenues reflected only in Q4 of FY11, so there will be significant topline impact in FY12. Akibia will add over Rs 3.5 bn to FY12 topline, playing a key role in projected 43% revenue growth for FY12.IM is among theMore importantly, Akibia has strong pedigree in the IM space, which is one offastest growing IT the fastest growing IT segments. This can lift overall growth rates for Zensar.segmentAlso, Akibia presents significant cross sell opportunities. Several verticals within Zensar see opportunity for increment growth coming from cross selling opportunities. The cross sell opportunity could an incremental 5-10% growth to Zensar over next couple of years. Verticalisation will help in better client relationships The other significant change at Zensar is creation of a few focussed verticals, and stated organisation drive to run the business around vertical-driven sales process. Done well, this may have significant benefits. It will allow Zensar to mine its own client base better. For example, earlier an insurance sales lead may notVerticalisation will have had incentive to push say an IM solution. Now, with a top-downallow better clientapproach to serving clients, the mantra would be to provide holistic solutions,mining incorporating various parts of the service offerings. Verticalisation will also allow better solution selling abilities. IT clients have now matured, they now want IT companies which can talk business rather than mere coding. With clients now beginning to expect and appreciate higher level sales, this is a move in the right direction. Large IT has already begun to move to verticalisation, we believe midcap IT companies which are fast off the block on this trend will gain as well.Four-S Research2 3. Company Report: Zensar Technologies23 Aug11 Market ignoring strengths in the businessNot a me-me-too in Zensars valuations seem to suggest that the market thinks its businesseverything it does portfolio is inferior to most IT midcaps. The market seems to be unwilling to give value to several strengths Zensar has built in recent years. Oracle PracticeAmong the leadingZensar is among the key players in India in Oracle delivery. It has more thanOracle shops in1,200 associates dedicated to this practice.India, ahead ofHaving executed over 500 projects, Zensars expertise extends over Oracle E-midcap peers Business Suite, Business Intelligence, Hyperion, Demantra, Oracle Fusion Middleware, Databases, Shared Services and Oracle Retail. It is a Platinum partner of Oracle. Only Infosys is a Diamond partner, a higher category. In the Oracle practice, Zensar is at par or better than any other midcap IT company, and even capable of competing with the IT majors in some cases IM PracticeAkibia puts Zensar The Akibia acquisition was meant to be transformatory for Zensars IMamong the best IMpractice. With this acquisition, Zensar would count as among the leaders inshopsthe IM space amongst midcap IT. Ability to handle large clientsZensar has A large customer relationship is both a positive and a risk. The positive partsuccessfully is certainly the demonstrated ability to deal with a large relationship. Cisco ishandled Ciscoa more than $100mn account for Zensar. While in the last few months therelationship size of business from Cisco has dipped, as Cisco is going through an internal restructuring, Zensars ability to deliver here is certain a positive stamp for the company. Zensar now has another large relationship with Assurant, an insurance client. Strong on processWorld classZensar is the worlds first enterprise-wide SEI CMM Level 5 Company. Thisprocessesshows the companys focus on rigorous processes. Some of that is also visible in its financial processes, discussed below. Better quality of financials Zensar has done much better in cash flows compared to peers We believe if the market is hugely concerned about viability and growth potential of the midcap IT segment, the first thing investors should check is the cash flow statement. If investors gave due attention to the cash flows, we believe some of the company valuations would look different from what they are now.Four-S Research3 4. Company Report: Zensar Technologies23 Aug11Free Cash Generation at mid-cap IT companiesFY08-10FY08-111 3i Info -9,914 -8,4452 Geometric5257153 Infinite 6006374 Infotech Ent 580 -260Zensar has among5 KPIT 911549the better cash flow6 Mastek*1,2941,379performances7 Mind Tree1,9391,532amongst midcaps 8 NIIT Tech1,5361,6979 Polaris4,7154,777 10 Rolta*-7,495-10,093 11 Sonata 8851,873 12 Subex -222270Industry Average-387 -447 13 Zensar 1,853-69Rank 39(Rs mn) *Year ending JuneFancied midcapsSome mid-cap IT companies which are relatively more fancied than Zensar,like Rolta, Infotech like Rolta, Infotech Enterprises, and 3i Infotech, are running on inferior freehave poor cash cash flows. This means they are still buyers of growth. 3i has done dozens offlow focus acquisitions, Rolta seems to run a huge capex. What the table above tells us is that unless Zensar does a sizeable acquisition (which it did in FY11) it will generate free cash. Judicious use of cash flow important for driving growthCash flows-M&A We believe this is a strategy which can lead to sustainable growth generatean important free cash, do a focussed acquisition to plug portfolio gaps and enhancegrowth strategygrowth rates. The trick here is to maintain a tight leash on operating cash flows, and do acquisitions judiciously.Four-S Research4 5. Company Report: Zensar Technologies23 Aug11Some peers have Simple as it sounds, this is not something all that easy to implement, if youfrittered cash away look at the peer group. Both 3i Infotech and Rolta generate large amounts ofoperating cash, yet they run hugely negative free cash. In 3is cash, it is bothaggressive fixed asset purchase and acquisitions. In Rolta, it is mainly fixedassets which more than eat up the cash flow. In 3is case, we believe there islack of discipline in acquisitions, in the other case, you have to question theneed to massive investments in fixed assets.Take another case, Infotech Enterprises, which has a market cap of more than2x Zensar. It has generated just marginally better operating cash flow asZensar over the last 5 years. In 3 of these 5 years, Zensar has done better.Infotech again has invested 50% more in fixed assets compared to Zensar.In sum, we believe Zensar is doing far better than peers in both free cash flowgeneration, and end use of cash flows.Better working capital managementThe chart below shows debtor turnover for the latest financial year. As can beseen, Zensar is comfortably above peer average, and behind only two of thepeers on this parameter. Companies like 3i and Rolta, which dont seem tovalue free cash flows, are among the lower ones on this parameter. Debtor Turnover (x)10.0 9.0Zensar has 8.0 7.0superior debtor6.0collections5.0 4.0 3.0 2.0 1.0 0.0Infotech Ent Zensa r Infinite MastekSubex Geometric SonataInd Avera ge 3i InfoPola risKPIT RoltaNIIT TechMind TreeBetter receivables management is one reason for the healthy operating cashflows at Zensar.Better capital efficiencyThat Zensar is running an efficient operation is clearly visible from the ROCEchart below. Zensar has returned an ROCE of above 25% for 6 of the last 8years. Other than Infinite and NIIT Tech, Zensar is above all peers on thiscount.Four-S Research 5 6. Company Report: Zensar Technologies23 Aug11ROCE (%)45.040.035.0Zensar scores in30.0capital efficiency25.020.015.010.0 5.0 0.0Infotech Ent InfiniteZensarMastek Geometric SonataInd Average 3i InfoSubex Polaris Rolta KPIT NIIT Tech Mind TreeValuation anomalyNo need to quote below peersZensar is getting valued below the average valuations for mid-cap ITcompanies. In the section on peer comparison below, we have further splitthat mid-cap IT space into two parts: companies getting low valuation, andthose fancied somewhat more in the market. There is a distinct difference inthe valuation of companies in the two groups.Zensar seems to be getting clubbed amongst the lesser fancied midcaps.While the better valued peer group quotes at a trailing PE of 8.65, Zensar isquoting at a PE 4.21. As we have seen above, the strong financials andstrengths in key business niches suggest there is no need for a valuation gap.Even if the gap is partially bridged, the stock offers a strong upside.Risk factorsHigher contribution from single clientZensar has high Zensar has around 31% of revenue coming from its largest client, CISCO,dependence on which it lists in its manufacturing vertical. This makes Zensar highly sensitiveCisco. This year, to performance of CISCO and its decisions regarding IT expenditure. Withbusiness from Cisco CISCO undergoing structural changes and facing budget cuts, Zensar may notcould sufferwitness major growth in this account in near future. But Zensar is nowdiversifying its business into various segments to mitigate dependence onCisco. Zensar will also get help from cross-selling to Akibia clients which willagain reduce this risk.Currency RiskWhile Zensar hasRevenues for Zensar are mostly in foreign currency, making Zensar highlymanaged currencysensitive to currency movements. Zensar is already looking to diversify itswell, current geographical client base in emerging countries and Asia pacific.volatile financialIt must also be pointed out that Zensar has managed forex risk well so far.markets pose a risk While some other midcap peers gave nasty currency shocks around 2008/09,Zensar was not among these.Four-S Research 6 7. Company Report: Zensar Technologies23 Aug11 Peer Benchmarking The peer set: midcap IT companiesZensar is squarely With a market capitalisation of around Rs 5.55 bn, Zensar is a midcap ITplaced in the middle company. The table below gives key headline data for the midcap IT space. Asof the midcap IT can be seen, sales, EBITDA and PAT for Zensar place it close to the midpointuniverse by size of midcap IT universe. However, in terms of value ascribed to the business, whether via market cap or EV, Zensar falls considerably below peer averages. This is also evident from the last row of the table below, where we have given how Zensar compares against peer averages. MarketEVSalesSales 3 EBITDAEBITDA PATPAT 3Cap yr3 yr yrCAGR CAGR CAGR 3i Infotech 5,45227,248 25,875 6%50,415 8%2,536 -2% Geometric 2,4482,384 6,229 2%9,235 129%575`-ve Infinite3,0613,602 8,89434%14,78759%1,072 53% Infotech Ent12,705 9,20812,17516%18,03420%1,397 28% KPIT13,118 12,128 10,23514%15,22110% 94615% Mastek2,4851,215 7,138-13% 8,722 -26%677-31% Mindtree14,122 13,709 15,33210%17,85020%1,016 32% NIIT10,569 9,48512,32312%20,48029%1,822 30% Polaris 13,239 11,874 16,200 7%21,39010%2,119 31% Rolta 15,827 28,377 17,41113%37,402-12% 3,821 12% Sonata3,2772,09314,111-6%14,008-4% 8566% Subex 3,1198,535 4,926-6%13,12861% 788NA Average 8,28510,821 11,984 7%20,05625%1,469 17% Zensar5,552 7,240 11,48312%20,71511%1,363 25% (Rs mn) Comparing key P&L items Note the CAGRs3 year CAGRs for The key factor to note in the above table is the 3 year CAGR ratios for salesZensar are above and net profit. On each of those counts, Zensar fares as much or better thanpeer averagespeer averages. Profitability: Sustainable strong profitsProfitability better Zensar has been able to maintain good profitability across last few years. Its netthan peer averages margin has been around 12-13%. This is again in line with peer group average. For FY11 for example, the peer set has a net margin of 12.3%, as against 11.9% for Zensar.Four-S Research 7 8. Company Report: Zensar Technologies 23 Aug11FY11 Margin (%) Company EBIDTAPAT Rolta 21.5 21.9 Polaris 13.2 13.1 Infotech Enterprise 14.8 11.5 Mindtree11.66.6 KPIT47.7 29.6 NIIT16.6 14.8 3i Infotech 19.59.8 Infinite16.6 12.0 Subex 26.7 16.0 Sonata9.9 6.1 Geometric 14.89.2 Mastek12.29.5 Average 16.7 12.3 Zensar13.6 11.9 Balance sheet ratios Much better on leverage Debt Equity (x)Interest Coverage (x) CompanyFY10FY11 FY10FY11 Rolta 0.80.7 6.8 1.1 Polaris- 0.0176.399.3 Infotech Enterprise--52.885.6 Mindtree - 0.0 55.098.0 KPIT0.30.2 15.585.3 NIIT-0.1 0.4 74.8 292.6 3i Infotech 2.21.9 2.8 2.5 Infinite0.22.6 36.378.5 Subex 2.22.6 1.4 2.9 Sonata0.10.1 16.315.8 Geometric 0.10.0 14.369.7 Mastek0.10.0 47.066.7 Average 0.50.7 41.674.8 Zensar0.10.5 52.623.6While Akibia deal While large cap IT companies are sitting on cash hoards, midcap IT companieshas pushed up debt, have struggled with debt. Not so for Zensar. While it currently does not have ain general Zensar cash hoard due to the recent acquisition, its debt situation is at least far moreFour-S Research 8 9. Company Report: Zensar Technologies 23 Aug11has maintained lowmanageable compared to many of its better fancied midcap IT peers.net debtAmong larger peers, 3i Infotech has a big mess on its balance sheet. Roltasdebt-equity also generally has been larger than Zensar.Better liquidity ratios Current Ratio (x)Cash Ratio (x)CompanyFY9FY10 FY11FY10 FY11Subex0.680.500.610.06 0.02Sonata 1.231.651.780.20 0.25Infinite 1.331.530.610.10 0.20Mastek 1.742.882.850.61 1.243i Infotech2.922.534.410.65 0.32NIIT 1.172.062.540.40 0.65Geometric2.292.592.940.57 0.21KPIT 1.382.393.050.59 0.81 Mindtree1.521.792.470.12 0.15Polaris2.161.671.760.42 0.41Infotech Enterprise2.662.803.771.28 1.08Rolta3.253.774.530.50 0.21Industry Average1.82.182.610.46 0.46Zensar 2.422.831.940.95 0.34We can see Zensar maintaining historically better liquidity status compared toindustry. Even with reduced liquidity due to Akibia acquisition, Zensar stillmanages to maintain stronger liquidity condition than most of its peers.Comparing Peer ValuationDividing peer set into two partsIn the table below, we have divided midcap IT companies into two parts those getting low valuations, and those getting somewhat better valuations. Inthe first lot are companies like Subex, Sonata, 3i, etc., and in the second lot areKPIT, Hexaware, Mindtree and so on. Valuation*CAGRs (FY09 to FY11)RatiosCompany P/EEV/ EV/SalesSales NP D/E ROCEROEEBIDTALess valued midcapsSubex 3.96 6.50 1.77 -6.0%NA 2.6 14% 32%Sonata3.83 1.49 0.15 -6.0%6.0% 0.1 24% 22%Infinite2.86 2.44 0.41 34.0% 53.0% 2.6 58% 62%Mastek3.67 1.39 0.17-13.0%-31.0% 0.0 11% 12%Four-S Research 9 10. Company Report: Zensar Technologies23 Aug113i Infotech 2.155.401.066.0% -2.0%1.9 12% 22%NIIT Tech 5.804.010.77 12.0%30.0% 0.4 30% 48%Geometric 4.262.580.382.0%NA0.0 33% 29%Average 3.793.400.674.1%11.2% 1.1 26% 32%Higher valued midcapsKPIT 13.877.971.19 14.0%15.0% 0.2 18% 31%Mindtree 13.907.680.91 10.0%32.0% 0.0 15% 14%Polaris 6.255.550.757.0%31.0% 0.0 19% 22%Infotech5.115.110.78Enterprise 16.0%28.0% 0.0 13% 14%Rolta 4.147.591.63 13.0%12.0% 0.72% 22%Average 8.656.781.05 12.0%23.6% 0.225%32%Zensar4.164.620.63 17.0%25.0% 0.533%34%*based on latest financial year The low PE midcap companiesLow PE ITLets see the business ratios of the low PE set. As a group, their sales havemidcaps have low grown at a CAGR of 4% over FY08-11, while their net profit has grown atgrowth rates.11% in the same time.Zensar is doingIn the lot, there are some companies specifically struggling with profitability.better Mastek has made net losses in the last 3 quarters, and in two of these, it made an operating loss as well.Low PE ITApart from differential growth rates, another key point to note is the vastlymidcaps also havedifferent D/E ratios for low PE versus high PE companies. In the low PE set,poor balance sheetsSubex, Infinite and 3i have D/E ratios around 2x or more. Couple of these companies have outstanding FCCBs which are unlikely to be converted into equity. These will need to be refinanced. In other words, the low PE set is getting low valuations since it is riddled with one or more issues: sub-par growth, high D/E, consequently low capital efficiency ratios. In the cases where D/E is more than 2x, there could be some minor liquidity concerns in the market. Besides issues with their P&Ls and balance sheets, we suspect the market may have issues with corporate governance levels in some of these companies. Take a company like 3i for example. This company did an IPO at a price of RsGovernance quality 100 in April 2005. In more than 6 years of trading since then, the company hasquestionable insome midcaps rarely quoted above its IPO price. It has done two dilutions at prices considerably below its IPO price. The company took a large Rs 2.8bn write- off in FY10 for discontinuing operations of the kiosk business. Yet, there has been no change in management. This is a supposedly professionally run company, yet there seems to be little accountability. In a scenario like this, no wonder valuations have slid down. The high PE midcap companiesHigh PE midcap The P&L and balance sheet ratios are starkly different for high PE midcap ITcompanies have companies. These have grown sales at a 3 year CAGR of 12% versus 4% forFour-S Research 10 11. Company Report: Zensar Technologies23 Aug11better numbersthe low PE companies; these have grown net profit at a CAGR of about 24%versus 11% for low PE companies.More importantly, note the D/E ratio and the capital efficiency ratios. Half ofthe high PE companies are debt free, while none have a D/E ratio more than1x.Not all is rosy and clean in this universe as well. There is stuff here whichcould make an institutional investor uncomfortable. For example, atleast acouple of the peers in this set both took large write-offs on forex derivates.So where to place Zensar: with low PE or high PE companies?The market is clubbing Zensar with low PE companies. Yet any performancecomparison does not quite support this act of the market. The above tableclearly shows Zensars performance ratios are more like the high PE set, asagainst the low PE set.Zensars numbersSpecifically, check this:and managementZensar has grown at a sales and net profit CAGR more in line with thequality put it inhigh PE set.high PE setZensar has generally maintained low D/E. The acquisition of Akibia raised D/E to 0.5x, still it is distinctly different from the low PE set.Capital efficiency is among the best in the midcap IT universe.Zensar has managed its forex exposure well, it has not had to take a write-off.Four-S Research 11 12. Company Report: Zensar Technologies 23 Aug11Valuation and Price TargetDeserves to be rated with the high PE setWe think the market should assign valuation more in line with the high PE setto Zensar. As explained above, this assertion is based on Zensars betterfinancials; its increasing robust business model where it is now amongst thetop players in India in Oracle and infrastructure management; and its likelygrowth momentum over the next two years.Price TargetZensar should hit a The average discount the better performing set is getting is a PE of just lessprice of Rs 250 bythan 9x based on historical values. Assigning a 15% growth rate to this set, theMarch 2013. Weexpected FY13 PE comes to about 6.5x.expect it to rerate While we believe that Zensar should quote at parity, lets assume a discount oftowards valuations25% to this value which means a forward PE of about 5.2x FY13 numbers.of better ITBased on expected earnings per share of Rs 44 for FY13, this leads us to anmidcaps expected share price of Rs 230 for March 2013.Four-S Research 12 13. Company Report: Zensar Technologies23 Aug11 Zensars Business Getting a grip on Zensars business modelValuation suggestThe market discounting for Zensars business model would seem to imply thatmarket negative on it is a totally commodity business model, perennially working under severeZensars price pressure; or the business is already past the maturity phase, into whatfundamentals you may call in standard business cycle terms the decline phase. Lets first see the key points on the business model here which we think are perhaps influencing investor view on Zensar: There is no differentiator Zensars business is commodity Is this a declining business Zensars business more commodity than an average IT company? There is a lot of commodity element to Indian IT companies whether it is Zensar, or TCS of Infosys, there is no denying that. A SAP implementation project, or a legacy maintenance project, could be done equally well by a two dozen or more companies in India. While large IT companies may get the benefit of size and superior brand, midcap IT companies dont have this luxury. Product companies, like Oracle Financial Services, are an exception. Midcap IT companies realise the need to differentiate in order to create niches for themselves where they can compete effectively, and enjoy good business economics. The typical ways are: pick one or more technology service lines, or verticals or geographies to build relative advantage. Some others have tried to enter product business, sometimes by acquisition.Market seems Zensar is no different; the management is focussed on the need to buildunaware of segments of relative strength. Some areas where Zensar stands out:Zensars areas ofIts Oracle practice: Zensar has among the best practices in Oraclestrengthrelated projects in mid-cap IT. Zensar has 1,300+ people in its Oraclepractice, has completed 500+ client engagements over the last decade.Zensar had bolstered this practice in 2007, with the acquisition ofThought Digital. Strong traction in South Africa: Zensar has already built a goodpresence in South Africa. It has acquired some fairly large customersthere, for example, 3 of the top 5 insurance companies. Infrastructure Management: The acquisition of Akibia has completelyaltered Zensars position in this business. With an annual revenue rateof well over Rs 4.5bn from just this business, Zensar has a superioroffering to most midcaps in IM.Four-S Research 13 14. Company Report: Zensar Technologies23 Aug11Is it in the numbers?Zensars superior Whatever be the story, an analyst will ultimately seek evidence in themargins suggest the numbers. So, for a mid-cap IT company, what number can show somethingbusiness is betterabout how commoditised the business is?than what the EBITDA margin is one relevant number to look at. If the business has nomarket thinks differentiator, EBITDA margin should compare poorly to peers.For Zensar, as we have noted earlier, this is not the case. While there arecompanies like Sonata, Mastek and Mindtree which have EBITDA margin inthe 10-15% range, Zensar has an EBITDA margin of 13.6% in FY11. Zensarhas increased its operating margin from 12-13% levels in FY07 and FY08, toaround 18% levels in FY10 and FY11, signifying increasing value add in thebusiness mix.Is Zensars business a declining business?While organic The first step to answer this would be to look at past growth rates for thegrowth is in single sector, and the company.digits, smart Net sales have grown at a CAGR of 17% over FY07-11. While some of theacquisitions have growth has come through acquisitions, the expanding operating margins, yearsallowed doubleof positive cash flow and manageable debt show the business is enhancingdigit topline CAGRvalue.While organic growth rates have fallen into single digits currently, this is morea result of global growth slowdown. In other words, slower IT sector growthrates are have a large cyclical component..But is de-growth imminent?Market has fearsIT services sector as a while continues to grow, and no one is questioning thethat small IT firms future of Indias IT services business as a whole. The issue here is dowill start to midcap IT companies have a role anymore, or is it a game only for the bigdegrow. So far no boys?signs of this We believe this is the crux of the issue. The market has somewhere taken theview that midcap IT companies will not be able to compete in the future, andwithin midcap IT, Zensar is particularly exposed.But is this assertion true, and if so, how exactly will it play out?Lets see on the second part how exactly will a de-growth play out.The typical mode for degrowth would be the overall market shrinks, sosome players have to drop out.Here this is not exactly the case. The overall IT services market is stillLarge IT firms areprojected to grow. So what the stock market is saying this large ITlooking for largerclients. SMEcompanies are used to growing at 30% plus, if the overall market growth rateslows down to 10-15%, they will eat up the small companies to maintain theirmarket open forown growth rates at 20-30%.midcap ITWhile this may very well happen, but current evidence does not point to that.Four-S Research 14 15. Company Report: Zensar Technologies23 Aug11 Large IT companies are trying to go up the chain, not come down the chain. They are trying to do things like: become consulting led, take over the entire IT organisation of large clients, etc. So the large IT companies are not yet competing with small IT companies for the same client. Any relevant number for this?Number of active We think the correct numbers to check this would be things like total activeclients continues to clients, and average business/client. When these numbers start showing aincrease. This isdeclining trend, then certainly fears on the future of midcap IT would rise.evidence degrowthZensar has increased its total client base from 200 at the end of FY07 to aboutfears are overblown400+ by the end of FY11. In sum numbers dont support stock market perception On both counts the commodity nature of business, or risk of degrowth we find the markets fear overblown. Zensars margins are pretty good. And the next two years it is set to grow. The risk of a new US slowdown is certainly there, but that affects the entire Indian export sector, not just Zensar, or India IT services industry. Notwithstanding the US recession threat, Zensar at the end of FY11 is actually strongly positioned for growth. In the next section, we see how. Positioned for growth with an increasing robust business modelZensar has biffedThe Zensar management implemented two big developments at the end ofup its businessFY11 which should help drive growth over FY11-13. These are:modelThe Akibia acquisition Re-structuring the business into 5 verticals Lets look at how these two drive growth and make the business model more robust. The Akibia deal a game changer In November 2010, Zensar made a big move in the rapidly expanding Infrastructure Management and Information Security segment by acquiring Akibia Inc. With a turnover in excess of $100mn, this not only adds significant turnover to Zensars topline, it will also add to Zensars addressable market and growth potential.Akibia dealWith this acquisition, Zensar will expand its potential market and growthtransforms opportunity in not only infrastructure segment but will help in providingZensars position in mission critical solution. This acquisition helps Zensar to use combined andthe IM space integrated services to cross sell among existing client base. Akibia will help expand Zensars customer base and will provide global operational scale and opportunity to enter new geographies and market more efficiently. It added a team of 350 professionals with 2 delivery centres in US and Europe. This enhanced capability will help Zensar bid for multi-million dollar projects which involve multiple service lines.Four-S Research 15 16. Company Report: Zensar Technologies23 Aug11 About Akibia Akibia is a US based firm, founded in 1988. It provides infrastructure management services to companies worldwide to help them optimise, manage and support their infrastructure. It has more than 900 customers. Akibia helps its clients to improve the availability, reliability and performance of their data centre, network and security infrastructure. With its expert consulting Akibia helps IT organizations reduce costs, increase efficiencies and manage risk in the data center. The Akibia Impact There are several ways this deal will impact Zensars numbers:FY12 will see full Immediate topline impact: In FY11, the Akibia numbers formed partreflection of Akibiaof the topline only for Q4. FY12 will see the full integration of Akibiarevenuesnumbers with Zensar. This itself will lead to a growth of over Rs 3.5bnin topline for FY12. Gives a big push in the important IM space: IM, or specifically,Will lift overallremote IM (RIM) is among the fastest growing IT sub-segments. IM isorganic growtha large $370bn market, of which remote IM is about $95-108bn. Indiais rapidly gaining traction in the RIM market. Offshoring to India isgrowing at above 20%, according to Gartner.Before the acquisition, Zensars presence in this space was small,though growing rapidly. By 2010, this business was 4 year old atZensar, with 50+ clients, serviced by 402 associates and growing atover 50%.Akibia had a client history of about 900 clients at the time ofZensar is now acquisition, and 325 employees. With a revenue run rate of aboutamong top 10$108mn, this has added to Zensars capabilities immensely. Also, 70%players in IM inof this revenue is recurring, giving high revenue visibility.India The Akibia acquisition puts Zensar among the top 10 players in IMspace in India. Cross selling opportunities: Akibia has a large client base of leadingglobal companies. Zensar sees significant cross selling opportunities inthis deal. For example, a large investment bank is a customer ofCross selling Zensar in Asia and Akibia in the US. So Zensar can sell Akibia to thisopportunities exist bank in Asia, while in the US, it can hope to make inroads with thehelp of Akibia. The banking vertical itself is expecting almost 70% oftheir growth in the next 1-2 years to come by cross-selling.Geographical expansion of Akibias lines is another way to benefitfrom the acquisition.Four-S Research16 17. Company Report: Zensar Technologies 23 Aug11 Verticalisation: More focus, more expertise, deeper relationshipsVerticalisation: a The IT market place is changing from technology support to solution selling.need of the hour IT service companies are moving away ahead from mere application development and outsourcing to be a transformation agent for their customers. With a well rounded capability set in service offerings, growing share of enterprise revenues, Zensar felt it was ready to into business solution selling mode. Recognising this trend, Zensar has restructured as of FY11 into 5 focus verticals: BFS, manufacturing, retail, insurance, connected services. Verticalisation of the business will help Zensar use its deep industry knowledge and technology expertise to cater more effectively to customers requirements. Zensar is also looking to push further its consultant-based model which integrates consulting with business solution development. It is building a strong consultant team with extensive experience in different verticals like banking, retail, insurance, etc, they will consult Zensar customers to help them achieve their business goals with Zensar solutions. Below we take a look at the key verticals.Vertical Manufacturing: Among top IT spenders Zensar has strong presence in the manufacturing sector which is one the top IT spending sectors globally. The manufacturing sector constitutes 39% of top line for Zensar making it the most important vertical for Zensar.Largest revenue Zensars expertise lies in discrete manufacturing which constitutes more thancontributingsegment60% of overall manufacturing companies IT spend. Working as a catalyst with global manufacturing companies, Zensar is helping clients to maintain competitive edge with the help of various enterprise class solution core to manufacturing and supply chain.Major Clients: Zensar has been able to gain substantial market in various attractive sub-CISCO, Trimble,segments like consumer products, Hi tech, Industrial among others whileSDS, NCR,looking very aggressively to increase share in other appealing segments likeNetgear, Activision, aerospace & defence and automotive. Zensar has been providing variousFujitsuservices like IM, EBS & mobility AMS & Web 2.0, BPO successfully with strong technology capability in Oracle, MS dynamics, SAP, etc. Almost 80% of manufacturing revenue coming from single customer i.e.20-25% growth in CISCO, is a potential risk factor, which can put manufacturing vertical revenues in a tight situation whenever CISCO puts constraints on its IT plans.non-CISCO This is visible in FY12, where revenue contribution from CISCO businessaccounts expected. could stay flat or come down. The manufacturing vertical is looking forward to reduce this dependency on single client by expanding non CISCO accounts to mitigate this risk. The aim is to grow non CISCO manufacturing accounts by 20-25% in first year with similar or better prospects in next two years. Most of this growth (~75%) is expected from new accounts which are anticipated with verticalisation strategy and Akibia cross-selling.Four-S Research17 18. Company Report: Zensar Technologies 23 Aug11Looking forEngineering and PLM is one gap in Zensars ability to cater to theacquisition in USmanufacturing vertical. Zensar aims to plug this gap through an acquisition inand IndiaUS/Europe in the medium term. Zensar has also developed their own IP like Autozenics and NExchange alongDeveloping IP like with other IP in areas of traceability, quality and PLM, SCM. This showcases Zensars belief on creating own IP and flourishing innovation withinAutozenics organisation. Company has high hopes from the Autozenics product, which is a Microsoft dynamics solution for SME in auto cluster.Vertical Banking and Financial Services BFS, along with insurance, constitutes 18% of total Zensar revenue in FY11 with BFS itself touching $45mn making it second largest vertical within Zensar. Zensar has core competence in BFS sector due to rich industry experience and technology expertise with good understanding of domain, process and technology.Business Lines ContributionService Lines Contribution 42% 58% 26% 18%22%14%12% 8% Run The Bank -OthersTestingApplication DevOthersPrivate Banking Investment Banks Management Asset RTBExpecting rise inZensar provides range of services in this sector from implementation totop line by cross- consulting, process outsourcing, maintenance, infrastructure and testing acrossselling with Akibiavarious sub-sectors like Retail Banking, Private Banking & WealthcustomersManagement, Capital Markets, Compliance & Risk Management. The Company is looking to grow in this segment at the rate of 20-25% in next 2 years with the help of existing strong clientele base such as UBS, Credit Suisse, CLSA and KBW. Zensar plans to break into Fintech Top 100 within next two years. For this,Aims to break into Zensar will need to hike revenue from BFS vertical to around US$55-60mnFintech Top 100 in revenue from existing US$45mn in FY11. Zensar plans to achieve this2 yearsgrowth by establishing a centre of excellence to build frameworks and IP for various sub-sectors like investment banking. While Zensar is not doing much in retail or commercial banks, it has decent expertise with investment banks. Most of the projects in this vertical are of the type of Run The Bank service which mainly deals with maintenance andFour-S Research18 19. Company Report: Zensar Technologies23 Aug11 support projects which give Zensar assured annuity business. Till now Banking and Financial services vertical was more focused onThe vertical expects emerging market with 90% business coming from this market. Zensar is aware of the need to derisk geographically; accordingly the vertical would devotestrong cross selling more attention to revenues from developed markets. This will also helpopportunities withAkibia Zensar to push up margins from banking vertical. The BFSI vertical has strong opportunity of cross-selling their services to Akibia clients with as many as 23 unique banking and financial services clients in Akibias portfolio.Vertical InsuranceZensar has a built The insurance vertical predates the current round of organisation widegood expertise inverticalisation. Zensar had created this vertical in 2008, recognising the needinsurance vertical to give specific focus to this. A result of this early start is that the vertical team believes it has the domain expertise now to target top 5 players in each geography the Americas, Europe, South Africa, APAC. As the leading insurance companies, who were early IT adopters and are now stuck with legacy systems, try to transfer to the latest technology, Zensar hopes to benefit. It has already executed large projects successfully in South Africa among other projects.Account share (%)Line of Business 1%Assurant 1%1% 1% SiliceHealth9% Liberty Life 24%Life & Annuities40%13%PrudentialMutual Funds Discovery14%14% 60%Holdings RMAShort term &22% Speciality Stanlib Mutual & Federal The insurance vertical currently has a high US tilt, due to business from its top client Assurant contributing 60% of vertical revenue.3 of the top 5 Zensar is now looking to expand their geographical reach by targeting Europe,companies in South South Africa and other geographies like Australia, India, etc. Zensar hasAfrica are clients already bagged South Africas 3 of top 5 Insurance companies and the top organisation in India. With this, Zensar has become South Africas biggest Indian IT vendor.Four-S Research19 20. Company Report: Zensar Technologies 23 Aug11Zensar has strong strategic plans to build up this segment by targeting top 5organisations in all major geographies with major focus on life, health andP&C. Zensar has strong presence in health insurance segment with majorityclients coming from that area. Now Zensar is looking to build pipeline in lifeand annuities for Europe region while looking to maintain stronghold in healthsegment in US region and focusing on P&C segment in US, Europe and SouthAfrica region.With 6 insurance clients in Akibias portfolio, Akibia- Zensar cross-sellingopportunities also look good. This alone can drive add almost 10% growth tothe vertical revenues. With strong visible pipeline, the Insurance vertical isexpected to grow at a growth rate of 25-30% for the next two years. Stronggrowth is envisioned in US and UK region while Zensar is looking to doubletop line from Australia region which currently has very low base though.Zensar is also working on developing IP in this segment with focus onMultichannel Platform for Insurance, Readily deployable SOA componentsand Compliance enabled Testing framework. The vertical is looking to addalmost 15% of revenue from IP sales in next two years.VerticalRetail: a $146bn IT marketZensar has very positive outlook towards retail vertical which was a $146bnmarket opportunity in year 2010 with speciality and grocery segmentconstituting almost 60% of market. With strong relation with EuropeanProviding entiremarket which makes ~60% of total revenue, Zensar is looking to capturegamut of services much bigger pie in this segment by expanding in other territories. Zensar isfrom professional keeping focus on mid size segment and aggressively pursuing opportunity inadvisory to ITtheir strong domains like Speciality, Groceries and Department providing theirstrategy, BI andexpertise services like BI & analytics, AMS & Web 2.0, IM, and Packageretail specific solutions.solution. Zensar is already scouting different regions to diversify geographical reachwithin the retail sector by reaching out to other markets. For example, it istargeting US which is driven by its current e-retailing trend to capture moreand more clients based on its expertise in this domain. Zensar is alsospreading its client base in emerging markets like middle east region andgarnering few more clients in Australia again with recent success of openingaccount for web retailing.Zensar has developed a clear cut strategy to be among top 3 service providersin non-US markets such as Europe, ME, South Africa, India, among others,which will act as a charge for retail vertical growth. The main enabler for thiswould be the strong Oracle capabilities Zensar has developed. Close to 90%of its current business is Oracle oriented. Zensar is also witnessing gooddemand for its SAP offering with good traction from US market. With thisstrong pipeline, retail vertical is also looking to expand its offshore developingcenter strength. Zensar has developed its own IP in this segment like MultiFour-S Research20 21. Company Report: Zensar Technologies 23 Aug11 channel, SmartShop, ZRMS and Batch Scheduler. Zensar boasts of strong clientele in this space like Carrefour, NAAFI, Wet Seal, Acosta etc. Zensar has rolled out its SmartShop solution as of now only in India and company is experience positive response from the market. With further development and refinement Zensar looks to ring out this offering in other markets which will add up Zensar revenue from its IP products.Vertical Connected Services: Utilities, Healthcare & Government Connected services can be considered as incubator vertical for emerging or growing verticals within Zensar. The three emerging verticals currently housed here are healthcare, utilities and government. Within healthcare, Zensar is focussed on healthcare providers like hospitals and path labs, in the US geography. Whereas US healthcare market is showing high prospects with US$8-10bn per annum spend expected from healthcare providers till FY2015. The driver is the regulation driven Y2K like opportunity, the ICD-10The switch to ICD- remediation. The US healthcare industry needs to transition to ICD-10 by 110 presents a bigOctober 2013. By this date, ICD-10 codes must be used on all Healthopportunity in Insurance Portability and Accountability Act (HIPAA) transactions, includinghealthcare space outpatient claims with dates of service, and inpatient claims with dates of discharge Zensar is looking to build domain capability in healthcare through partnerships and to drive POC for new service areas. For Utilities, it wants to focus on US and Europe. The areas of focus are smart grid and smart metering. IM solutions could also help get business here. Zensar has strong 15 years hands on domain expertise in Utilities practices which Zensar is looking to leverage to garner more similar projects In the Government vertical, Zensar is still finding its feet in the Indian marketplace. Here the market already crowded with several other firms, Zensar needs to find its niche here. The company is developing low delivery cost model which is very vital to gain government projects where customers are like state govt, municipal corps and defence. Revenue Mix: A diversified sales mix Zensars revenues are distributed across verticals. Manufacturing contributes around 39% to Zensars top line. BFSI and retail are other major vertical for Zensar contributing 18% and 8%, respectively, for FY11.Four-S Research21 22. Company Report: Zensar Technologies 23 Aug11Revenue Mix Revenue By Industry 2011 Revenue By Industry 2010Manufacturing &Manufacturing &TelecomTelecomRetail Retail 28%15%39%45%11%BFSIBFSI20%2% 18% 8% Pharma, Textiles &9% Pharma, Textiles &UtilitiesUtilities 5%MediaMediaOthers Others Zensar is focused on diversifying its business mix across verticals which can be seen in the trends for last few years. With decreasing dependency in manufacturing & telecom sector from 45% in 2010 to 39% in FY11 and 20% of BFSI in FY10 to 18% in FY11 Zensars deliberate efforts to expand their horizon and to capture opportunities in other verticals are very much evident. Global scale of operations Zensar derives its revenues across the globe with sales and operational presence in more than 11 countries including US, UK, Germany, Sweden, Finland, Middle East, South Africa, Singapore, Australia, Japan and Poland.Geographicaldiversification plan The share of the US market in total revenues went up in FY11, 64% from 60% in FY 10. This was mainly due to the Akibia acquisition, and the impact of its salesin place mix. In fact share of the US market was around 50% of revenues in FY07 and FY08. The increase in share of the US market has gone hand in hand with increasing EBITDA margins, indicating the lucrativeness of that market. Zensar is now looking to expand its offerings to other emerging market such as China, India, Middle east and SAARC countries. This is evident with setting upUS contributing of a delivery center in China and upcoming regional delivery center in Jordan.64% of revenue. Geographical Revenue Break up FY11 23% USA13%64%Europe Rest of the WorldFour-S Research 22 23. Company Report: Zensar Technologies23 Aug11 Historical Geographical Revenue Break1200010000Focus on seeking8000growth in new Rest of the World6000markets.Europe4000USA20000 FY07FY08FY09FY10FY11 Rs in mnHedging Territory Zensars pursuit to hedge the geographical risk is also evident with new emergingRiskterritories like South Africa which is one of the fastest growing territories forZensar. Zensar has also managed to garner faster growth in the Middle East.Company is also looking to invest heavily in India and China to build presence.Strong & diversified client baseZensar has been The company caters to clients all over the world providing end to end services totrying to reducetheir clients. Zensar boosts strong client base of more than 300 customers,dependence on including several Fortune 500 companies.Cisco Top 5 clients accounted for 46% of FY11 revenue whereas top 10 clientsaccounted for 54% of revenue.Revenue Top Client wise Top 10 client Top 5 clientFY10 64%54%FY11 54% 46%Zensar boasts diversified client portfolio with clients from various verticals. Somesample clients: banking vertical has Credit Suisse, UBS, KBW; retail has M&Sand Carrefour; manufacturing and media like CISCO, Activision, Fujitsu;insurance has clients like Assurant, Investsec, AXA, Prudential; and connectedservices has clients like National Grid and Morrison. Chart 3: Client Concentration Client Concentration FY07FY08FY09 FY10FY11 Top 5 client55%43%44% 49%46% Top 10 client 69%51%52% 60%54%Four-S Research 23 24. Company Report: Zensar Technologies 23 Aug11 Financial Analysis and Growth Outlook 26% CAGR for revenue expected during FY11-134 year revenue The Companys net revenues grew at a CAGR of 17% over FY07-11 to RsCAGR is 17%, 3 11.4bn from Rs 6bn in FY07.year growth is 12% The 3 year revenue CAGR is 12% as presented earlier. Revenue Growth12,00010,000 8,000 6,000 Other Income Revenue from Operations 4,000 2,000-20072008 2009 2010 2011 Rs in mnOver FY11-13,The top line however is expected to grow at CAGR of 26% over FY11-13 on theZensar will grow back of current acquisition of Akibia, which will add an incremental Rs 3.5bn tofaster than in Zensars top line for FY12. Further organic and inorganic growth is expected toFY08-11boost revenue of Zensar to reach Rs 19bn by FY13. Revenues Growth 18000 16000 14000Growth driven by 12000Akibia acquisition 10000and inorganic8000growth6000400020000FY09FY10 FY11FY12E FY13ERs in mnFour-S Research24 25. Company Report: Zensar Technologies23 Aug11Segment PerformanceZensar dividesGTS (Global Transformation Services) and EAS (Enterprise Applicationbusiness into 2 key Services) are the major service offerings from Zensar which constitute 65% andparts: GTS and24% of revenue to Zensar, respectively. Data Centre, Network & SecurityEAS Services (PSI Holdings) segment is also making headway in Zensar with ~11%revenue contribution from it in FY11 top line. Segment-wise Revenue Break-Up8,000 Global TransformationGTS and EAS 7,000 Services (GTS)6,000constitute major5,000portion of Zensars Enterprise Application4,000Services (EAS)revenue.3,0002,0001,000 Data Centre, Network &Security Services (PSI0Holdings)FY07 FY08FY09 FY10 FY11Rs in mnStrong Growth Global Transformation Services (GTS)seen in GTS GTS segment grew at a 4-year CAGR of 14% to Rs 7,433mn in FY11 from Rssegment 4,358mn in FY07. This is mostly organic growth, since the acquisitions Zensarhas done do not lie in this space. This is also the most profitable segment forZensar.Global Transformation Services (GTS) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,0000FY07 FY08 FY09 FY10FY11 Rs in mnEnterprise Application Services (EAS)Enterprise Application Services (EAS) segment grew at a 3-year CAGR of 13% toRs 2,757mn from revenue of Rs 1,700mn in FY 07.Four-S Research 25 26. Company Report: Zensar Technologies 23 Aug11 Margins expected to improve after initial dipMargins may dipZensar has managed to increase EBITDA at the impressive CAGR of 19% fromthis year due to FY08 to FY11. Zensar has shown strong financial discipline and bottom lineAkibia acquisition focus by maintaining EBITDA margin above 13% in FY11 reaching as high asand global turmoil 17.8% in FY 10 from 12% in FY 08. This growth in EBITDA margin is mainly due to improved contribution from higher margin GTS services which has better margins compared to other services. Acquisition of Akibia will ring in more revenue from Data Centre, Network & Security Services which may bring pressure on Zensars margins for short term. But further improvement in margins is expected in longer run as company strives to enter other profitable services and verticals. Consistently strong EBITDA performanceEBITDA1,80020%1,6001,40016%Zensar showcased1,200 12%strong EBITDA 1,000growth of 19% 800 8%CAGR in last five 6004004%years. Even better200growth expected in00%near future. 2008 20092010 2011EBITDA EBITDA margin Rs in mn Zensar net profit has grown at CAGR of 28% in last 3 years expanding net profit from Rs 640mn in FY08 to Rs 1340mn in FY11. Zensar has improved these net profit figures while keeping focus on net margin maintaining strong net margin of around 12% in FY11. Net profit is expected to show a CAGR of 23% growth over the next two years. This is mainly resulting due to expanding top line and improvement in margins too. NET PROFIT 1500 15%Zensar net profit 1000 10%has grown atCAGR of 28% in500 5%last 3 years0 0%2008 200920102011Reported net profit Net marginRs in mnFour-S Research 26 27. Company Report: Zensar Technologies23 Aug11 Financial AnnexureProfit & Loss StatementIncome Statement FY07FY08 FY09FY10 FY11FY12E FY13ERevenue from Operations 6,059 7,829 9,0819,528 11,383 15,60717,820Employee Cost 3,995 5,401 6,1336,2127,416 10,71211,974Other Operating Expenses525 581 614567668 1059 1209Sales, Admin & GeneralExpenses680 887 1,0341,0001,5961,873 1,960Miscellaneous Expenses 293542 49152 7485Total Expenses5,230 6,904 7,8227,8289,833 13,71815,228EBITDA828 925 1,2591,7001,5501,889 2,592Depreciation0 1,735 2,4272,6352,9423,549 3,549EBIT828 751 1,0161,4361,2561,534 2,237Other Income 90 122 141 83284256 292Interest and Finance Charges 215939 27 39 8686Profit before tax and ExceptionalItems897814 1,1181,4921,5011,704 2,444Exceptional Items00 000- -Profit before tax897814 1,1181,4921,5011,704 2,444Tax162169 256219184341 529Profit after tax before minorityinterest736 645 8631,2731,3171,363 1,914Minorities Interest and others 4.544.71 (3.00) --- -Reported net profit 731 640 8661,2731,3171,363 1,914 (Rs mn)Four-S Research 27 28. Company Report: Zensar Technologies23 Aug11Balance SheetBalance SheetFY07 FY08 FY09 FY10 FY11 FY12E FY13EShareholders EquityShare Capital239 240 240 216 433 433433Reserves and Surplus 2,138 2,600 2,346 3,081 4,027 5,3867,231ESOPs- - - - - --Total equity capital 2,377 2,840 2,586 3,297 4,460 5,8197,664LiabilitiesSecured Loans885 639 757 447 2,363 2,3632,363Unsecured Loans- - - - - --Minority Interest1 7 3 - - --Deferred Tax Liability 5 8 5 216 --Total Liabilities and OwnersEquity 3,267 3,486 3,351 3,745 6,839 8,182 10,027AssetsGoodwill on consolidation- - - - - --Gross Block563 2,317 2,019 2,128 5,480 5,4895,489Less: Depreciation 542 702 904 1,106 2,007 2,3672,722Net Fixed Assets21 1,615 1,115 1,022 3,473 3,1222,767Capital Work in Progress 128 29559145270100Investments204 160 237 151 256 309400Current AssetsInventory- - - - 836 836836Debtors1,304 1,443 1,333 1,426 2,295 2,4712,821Cash and Bank Balance448 376 811 1,300 1,100 1,3683,199Other Current Assets - - 535 439 536 726925Loans and Advances 297 379 526 726 1,445 1,4411,536Total Current Assets 2,049 2,198 3,205 3,891 6,211 6,8419,316Current Liabilities1,047 1,063 1,046 1,016 2,97018,523 21,150Provision102 116 281 357 411 5,7997,107Total Current Liabilities1,149 1,179 1,327 1,373 3,38024,322 28,257Net Current Assets 899 1,019 1,878 2,518 2,83144,091 64,910Deferred Tax Asset45486340 227 272270Total Assets 1,297 3,136 3,351 3,745 6,839 8,182 10,028 (Rs mn)Four-S Research28 29. Company Report: Zensar Technologies23 Aug11Cash Flow StatementCash Flows FY07FY08FY09 FY10 FY11 FY12E FY13ENet Profit/(Loss) before Tax 745814 1,118 1,492 1,501 1,704 2,444Depreciation 153174 243 263 294 355 355Dividend Income (12) (9) (13)(15)(9) (12)(12)Interest Expense21 593927 39 8686Loss / (Profit) on Sale of Investments(net)(0)(0) (1)(0)-- -Interest Income (19) (10)(10) (12) (15) (13)(12)Loss / (Profit) on Sale of Fixed Assets(net) (2) 0(0)1(0) --Operating Cashflow before Wcap 8861,028 1,375 1,756 1,802 2,119 2,860Sundry Debtors (474)(121) 144 (104) (123) (176) (350)Inventories - ---(43)--Other Current Assets(86) (69) (153)93(78) (191) (199)Loans and Advances(70) (40)(52) 1 77 (4) (95)Current Liabilities and Provisions 3324 147(37) 560 (948) 393Cash Generated from Operations 588802 1,461 1,708 2,194 801 2,610Direct Taxes Paid(163)(178) (411) (313) (788) (341) (529)Operating Cashflow- A425624 1,049 1,395 1,406 459 2,080Cash Flow from Investing ActivitiesPurchase of Fixed Assets including CWIP (1,205) (351) (678) (158)(273) 4370Purchase of business-(28) - -(3,054)- -Sale Proceeds of Fixed Assets 3 9125 1 1 - -Purchase of Investments in Mutual Funds (1,138) (999)(3,107) (3,416) (2,608) - -Sale Proceeds of Investments in MutualFunds1,0701,044 3,030 3,502 2,512- -Interest Income 19 10101212- -Dividend Income12 913 15 9- -Cash from Investing activities- B (1,239) (306) (605) (44) (3,401) 4370Cash Flow from Financing ActivitiesShares bought back-- -(400)- - -Shares allotted under ESOP -- - 511- -Secured Loans taken / (repaid) 734(237)137(314) 1,916- -Interest Payment(21) (59)(39)(27)(30) (30)(30)Dividend on Equity Shares and taxthereon (69) (98) (107) (126) (138)(154)(218)Proceeds from issuance of Share Capitalonexercise of stock options53-- -(51)(72)Cash from Financing activities- C700(391)(8)(863) 1,759 (234) (319)Change in Cash= A+B+C(114) (72) 435 488 (236) 268 1,831Group, Inc. as on the 1st January, 2011----36 - -Opening Balance562448 376 811 1,300 1,100 1,368Closing Balance448376 811 1,300 1,100 1,368 3,199(Rs mn)Four-S Research29 30. Company Report: Zensar Technologies23 Aug11RatiosRatiosFY08FY09 FY10 FY11 FY12E FY13EPer share numbers (Rs)EPS26.72 36.12 58.98 30.37 31.444.1CEPS 26.06 43.78 64.65 32.41 10.648.0DPS 3.804.505.503.494.5 5.3Profitability RatiosEBITDA margin 11.8%13.9% 17.8% 13.6%12.1%14.5%Pretax margin 10.4%12.3% 15.7% 13.2%10.9%13.7%Net margin 8.2% 9.5% 13.4% 11.6% 8.7%10.7%ROE 24.5%31.9% 43.3% 34.0%26.5%28.4%ROCE22.3%29.8% 40.5% 23.8%20.4%24.6%Growth RatiosRevenue growth29.2%16.0%4.9% 19.5%37.1%14.2%EBITDA growth 11.7%36.1% 35.0% -8.8%21.8%37.2%Net profit growth -9.2%37.3% 33.4%3.5% 3.4%40.5%Activity/Turnover Ratios(x)Asset turnover 3.5 4.2 4.3 3.93.42.8Working Cap turnover 8.2 6.3 4.3 4.34.33.3Debtors turnover 5.7 6.5 6.9 6.16.56.7Debtor Days6456 53 6056 54Payables turnover7 9 9 669Payables Days4942 39 6456 41Liquidity Ratios (x)Current Ratio1.9 2.4 2.8 1.82.83.3Cash Ratio 0.3 0.6 0.9 0.30.61.1Solvency Ratios (x)Debt Equity0.2 0.3 0.1 0.50.4 0.3Leverage Ratio 1.1 1.3 1.1 1.51.4 1.3Net Debt / EBITDA0.3 0.0-0.5 0.80.5-0.3Interest Coverage 12.726.252.632.5 17.926.1Four-S Research 30 31. Company Report: Zensar Technologies 23 Aug11About Four-S ServicesFour-S Services provides customised business and financial research to organizations across the globe. Thecompany also provides Investor Relations consulting to corporates based on in-depth sectoral and companyresearch. The company has an impressive client profile and a team of analysts covering the key sectorsincluding Finance & Banking, IT & Telecom, Retail, Media & Entertainment, Pharmaceuticals, Infrastructureand Manufacturing amongst others. For further information on the company please visit www.four-s.comDisclaimerThe information contained herein has been obtained from sources believed to be reliable but is notnecessarily complete and its accuracy cannot be guaranteed. 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This document is not to be reported or copied or made available to others.The company may from time to time solicit from, or perform consulting or other services for, any companymentioned in this document.For further details/clarifications please contact:Alok SomwanshiAjay JindalAlok.somwanshi@four-s.com Ajay.jindal@four-s.comTel: +91-22-42153659Tel: +91-22-42153659Four-S Research 31