Zensar Technologies Ltd

Date: 12 Apr, 2022

Zensar Technologies Ltd – Bet on digitization of businesses along with rising spend on cloud, artificial intelligence, data analytics, etc and emergence of new business models.

Zensar Technologies is our bet on a trend shift in businesses from traditional to transformational led by digitization along with rising spend on cloud, artificial intelligence, data analytics, etc and emergence of new business models. This was picked by our fund Rockstud Capital Investment Fund Series I around Rs. 320-350s in March 2022.

Company Brief – Zensar owned by Harsh Goenka group of company’s primary business involves providing digital and technology solutions to global customers. It provides application management (85% of revenue) and infrastructure management services (15% of revenue) to Manufacturing and Hitech industry (~40% of revenues), retail and financial account for (46.4% of revenues) and Emerging industries.

Application management service is an outsourcing task of providing ongoing support for apps to external provider i.e. IT cos that specializes in this type of maintenance and monitoring. This is across customer relationship management (CRM), content management system (CMS), enterprise resource planning (ERP) to business intelligence (BI).

Why we bought – Apart from financial parameters that we run across on quant below are some of the highlights which caught our attention for our investment.

• Firstly, changing industry dynamics to support smaller IT companies –Pre pandemic era, majority of companies across the world i.e., ~60% in 2019 had higher % of IT spend towards their old legacy applications which were already outdated and software parts of it were difficult to integrate into newer systems. Fast forward to post Covid 19 era, adoption of virtual business setup, digital connectivity became a new normal accelerated adoption of digital technologies. According to Zinnov Analysis, investment in digital technologies is expected to grow at a 16% CAGR to $2.4T from $1.3T in FY20-24. As there’s a shift to run business towards digital, industry’s seeing a structural change over deal wins from larger valued and longer-term deals (8–10-year deals) to smaller valued and shorter-term deals. The average
   outsourcing contract deal size amongst the Indian IT services vendors has come down from $22.9 M in H1 2018 to $17.2 M in H1 2019 and the average contract duration for Indian IT services vendors has come down from 40.2 months to 35.8 months, according to a report from GlobalData.
• Secondly, New CEO at helm has laid down 5 core strategies to spur long term growth - Co has appointed Mr. Ajay Singh Bhutoria as CEO & MD for 5 years from 12th Jan 2021. He has over 3 decades of industry experience across Americas, Europe & India. Prior to this, he was Chief Executive of L&T Nxt, whereas has spent 17 years at Cognizant leading retail, consumer goods, travel & hospitality verticals. The company has developed five Strategic Growth Opportunities (SGO) 1) Experience Services – driven by acquisition of Indigo Slate & foolproof 2) Advanced Engineering Services – to harness downstream demand from Experience Services and Cloud, 3) Data Engineering and AI, 4) Application Services – would be the largest area for the company, and 5) Digital Foundation Services– includes experience led infra services, where the pipeline is strong. In order to tap the downstream opportunities of experience led engineering and experience led infrastructure the company has focused on advance engineering, cloud, AI and data. The company is investing in sales, new leaders (hired a leader in geo & salesforce) and help salesforce with focused selling to drive growth. In addition, Zensar is also focusing on improving deal velocity, large deals and annuity revenues to tackle leakage in revenues. Hence, we expect Zensar to report improving revenue growth in the long term.
• Thirdly, client mining & logo addition remains – In the quarter gone by i.e. Q2FY22, they added 2 clients of $10 M category and 2 clients in $5 M category whereas in Q1FY22 they added ~14 new clients in addition to 8 additional a quarter before. Recent deal of $122 M, the city of San Diego a multiyear contract deal will lead to robust growth in revenues in years to come.
• Fourthly, Acquisition remains a key to build strong business - In past, company has grown through both organic and inorganic approach. They acquired cynosure (providing Guidewire platform implementation services to Property and Casualty (P&C) insurance) to drive its insurance business. The acquisition keynote (in retail order & warehouse management) was to drive company's retail business. Further, acquisition of Indigo Slate & Foolproof was to drive their experience led revenues across verticals. Further, the recent acquisition of M3Bi will strengthen its capacities in the field of Data Engineering, Advanced Engineering, and Analytical services in the field of BFSI vertical.