Buy This Small Cap IT Sector For Strong Long Term Growth & Attractive Valuation, Says IDBI Capital

IDBI Capital recently published a report on Zensar Technologies Limited - a small-cap IT sector company - suggesting "buy" stock of the company for a target price of Rs 280 per share. Based on the estimated target price and the stock's Current Market Price, the shares of the company could climb up to 22% in 12 months from its current level, giving a positive return on investments. It has a market capitalisation of Rs 5,198.57 crore.

Stock Outlook and Returns

The stock of Zensar Technologies last traded at Rs 229.65 per share on NSE, down 0.43% compared to its previous close. It touched the 52-week high on 3 January 2022 at Rs 539 and the 52-week low on 30 September 2022 at Rs 208, respectively. 
 
 In the last 1 week, its share price moved down nearly by 3%, while in the past 1 month it moved up by 6.52%. However, in the last 1 year, it moved down by 48.53%. In 3 and 5 years, its share price moved up by 27.23% and 37.15%, respectively.

Long-term growth intact

Considering the global macro challenges, we believe Zensar could see some pain in the near term. However, the company is poised well for registering revenue growth in the medium to long term. In addition, we do not expect any negative surprises in terms of furloughs despite challenging environment. This coupled with tier 1 hires, inorganic growth & structural changes in organization will drive longer term revenue growth.

Margins have bottomed out

During the last few quarters, Company's margins were impacted due to high attrition & weakness in key verticals. However, easing of supply side, price hikes, improving utilization rates and lower sub con cost will drive margins. Zensar aspires to achieve mid-teens margins by 2QFY24E. We have conservatively built 10.7%, 13.8% and 14.7% EBITDA margin for FY23E, FY24E & FY25E respectively.

Buy for a target price of Rs 280/share

The brokerage said, "Despite fears of recession, the global tech spend is expected to grow by 11% in the next year thus providing growth opportunities for the Indian IT firms. In addition, we do not expect any negative surprises in terms of furloughs despite challenging environment. Hence, we believe the company is well poised for registering revenue growth in the medium to long term. Further, management has undertaken various measures to address the supply side challenges & improve utilization levels. This coupled with calibrated price hikes, improving utilization rates and pyramid optimization will drive margins. Hence, we have conservatively built in revenue & PAT CAGR of 10% & 38% over FY23E-FY25E respectively. The recent fall in stock price prompt us to upgrade our rating from HOLD to BUY with a revised target price of Rs 280 (12x PE on FY25E EPS)."

Disclaimer

The stock has been picked from the brokerage report of IDBI Capital. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.