Re: {LONGTERMINVESTORS} Zensar Tech ...... Thread
RAJESH DESAI
Ganesh Natrajan,vice-chairman & chief executive officer, Zensar Technologies says that this quarter has been good for the company and everything looks positive at this point of time. He also says that companies which are well diversified should see 15% growth in volume and revenue this year.
Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.
Q: How does sales, margins and profit look for Zensat Technologies?
A: It has been a good quarter for the company. Revenue is up 32%, on year-on-year basis, at Rs 493 crore and close to 60% profit before tax. We had currency fluctuations problem in sequential quarter. Apart from that, the year has been outstanding. This quarter has been excellent. The volume growth is good and everything looks positive at this point of time.
Q: We had conflicting views from TCS and Infosys about growth. What is your view?
A: Infosys, is a company specific issue. Most of the results indicate good visibility. Companies which are focused on the banking and financial services sector might see some challenges. Well-diversified companies like Zensar and TCS, which has great story, don’t see any reason why shouldn’t see at least 15% or higher volume and revenue growth in this year.
Q: What is your own visibility for the Q1 or H1?
A: We are looking at 15% growth over last year in the first half. Overall, we are targeting a revenue growth of 18-19%. I would be very surprised if growth falls below expectation.
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CA. Rajesh Desai
RAJESH DESAI
“Zensar Technologies from the RPG stable is a globally focused software and services company spread across 20 countries across the world. ZTL provides endto- end services from IT development to BPO, from consulting to implementation. Currently, ZTL has employee strength of 7,286 globally, which would go up by 600-650 in the current year. RPG Enterprises is one of India's largest industrial conglomerates. With over 16 companies in its fold, the group has a strong presence in 8 business sectors. Established in 1979, RPG Enterprises is one of India’s leading business groups with a turnover of `17,000 crore. The group has more than sixteen companies managing diverse business interests in the areas of Power, Tyre, Infrastructure, IT, Retail, Entertainment, Carbon Black and Speciality. ZTL is CMMI Level 5 company with industry expertise that spans across Utilities. ZTL is now restructured on vertical lines with five global profit centres for 2011-13.”
“ZTL has nine 100% subsidiaries in the US, UK, Singapore, Germany, Japan and China (51%). With 7,286 associates and sales and operations presence across US, UK, Germany, Sweden, Finland, Middle East, South Africa, Hong Kong, Singapore, Australia, Japan, Poland and China, ZTL delivers comprehensive services in mission-critical applications, enterprise applications, e-business, BPO Services. ZTL has over 400 customers. Recently acquired Akibia has some marquee clients like Federal Reserve, JP Morgan etc.”
“Geographically North America continues to be ZTL’s major source of revenues, which generates over 71% of total revenues. Europe, Africa & Rest of the World (ROW) contribute the balance 10%, 9% & 10% respectively. Insurance, Banking & finance, Alliances & Others contribute 20% & 22% respectively, while Government, Healthcare & Utilities account for 7%. Among the service offerings, 62% revenue is generated from Application Management Service (AMS) while Infrastructure Management service (IMS) contributes the balance 38%. Location-wise, ZTL’s onsite revenues account for 70.7% of the total revenues. By 2020, new segments (SMBs), new verticals (Public sector and Defense, Healthcare, Utilities, Printing and Publishing) and new geographies (BRIC) is expected to account for 50-55% growth in the addressable market. Suitably exploiting these emerging opportunities both in the global and domestic markets will enable ZTL to meet its target of more than doubling revenue in the next three years.”
“ZTL is confident that infrastructure management will do well despite all the talks of the European crisis and the impact it could have on clients'' IT budgets. By 2015, Zensar expects infrastructure management business to scale up to US$400 million by leveraging capabilities of US-based Akibia. ZTL is well placed to tap potential in the SMB sector and new verticals (Healthcare, Utilities, Transportation), with their experience in emerging markets, mature service capabilities, global footprint and talent pool. Suitably exploiting these emerging opportunities both in the global and domestic markets can help ZTL to enhance its revenue substantially in 3 years. According to the IT industry, Infrastructure Management Solutions (IMS) is a $370 billion market, split into Data Centre services ($231billion), Remote Infrastructure Management ($108 billion) and Managed Services ($31billion). ZTL is undertaking a major business transformation by moving into new areas of IT outsourcing services and rejigging operations with a view to scale its revenue to $1billion (Rs 5, 400 crore) by 2016. At the CMP of Rs 275, the share is trading at a P/E of 6.0 on FY13 earnings. We recommend buy with a target price of Rs 330 in the medium term,” says Sunidhi Securities research report.
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CA. Rajesh Desai
Rajesh Desai
What are the strategies adopted by Zensar Technologies to become a billion dollar enterprise in four years?
A few months ago, Zensar Technologies won the Porter Prize for the best strategy process in the IT & Communications sector — the first time the prize, named after strategy uber-guru Michael Porter was held outside Japan in India.
For the RPG Group firm, it was just further validation of its efforts to ensure that it was indeed relevant in a crowded sector.
The Porter prize was awarded to the company for 'creating a competitive advantage by aligning its strategy to customer centricity and continuous innovation' and vicechairman & CEO Ganesh Natrajan says that the company's focus has been on innovation since inception.
"When we started in 2001, we were a brand new software company with no reason to exist. We had to have a different point of view if we were to be taken seriously and do something different from our more established peers. We wanted to be a company clients would come to if they wanted to challenge the way they did software development," he says. The focus seems to be paying off.
Zensarclosed last year with revenues of $372 million and has been growing at a steady pace despite a not too conducive business environment. Now it has set its sights higher, on that magical billion dollar mark. "We have the potential to continue to grow at 20% over the next few years, but we still need that additional c apability to grow 10% and make those large deals happen," says Natarajan.
While bigticket acquisitions may or may not happen, Zensar has been working at fine tuning its internal processes over the last few years to try and hit $1billion in revenue by 2016-17. "Our existing team will continue to grow at about 20%, but this will bring in that incremental push. About another $100 million will be through acquisitions, but the rest will be organic growth with people exceeding their own capabilities," he says.
In the last six months alone, the company has sealed three deals of over $5 million and is planning to set up a separate team to focus on deals of this size. In 2010, Zensar acquired the US-headquartered Akibia which gave it a solid presence in the rapidly growing infrastructure management segment.
This is an important area for the company as the practice has been growing at about 60% and contributes about a third of the company's revenues. This will be an important part of its quest to hit the billion dollar figure, along with manufacturing and retail which currently comprise 50% of revenues.
One thing that works to its advantage is that the contribution of the financial sector is relatively lower. Healthcare is also fast emerging as an important segment. Dipen Shah, Sr-VP, private client group research, Kotak Securities says, "Their strategy is pretty well laid out.
The company has indicated the areas in which it plans to grow. This is a strategy that can definitely take them much higher provided it is executed properly." The biggest change has been in organisation structure, moving from being services led to a vertical led one.
"Earlier, the customer expectations were around technology and as that started changing, they wanted us to understand their business and how changes like social media and mobility affect them and suggest what's best for them.
Verticalisation enables us to focus on this and fit the gap between technical changes and domain requirements," To ensure that it gets all the strategic inputs possible, the company has a three dimensiona l view towards strategy formation —top down, bottom up and outside in. The top down view is what the industry is doing and finding its niche and innovating in it.
The bottom up comes through the vision communities where new ideas come from. Vision communities are employee centered strategy building exercises which have resulted in the recent thrust on mobility applications and mobile appstore solutions.
The final aspect is getting the customer's perspective on what their future needs will be, and to that end the company holds an annual meet where it brings in its global partners for a two day session to brainstorm about where they see their respective industries heading. The recently set up Product Lifecycle Management (PLM) practice, launching traceability solutions for manufacturing and the move towards providing its insurance clients Policy Administration Systems (PAS) were all a result of a need voiced by clients.
However, not everyone is convinced about the practicality of this target. A few equity analysts who spoke on the condition on anonymity said that given the company's current rate of growth, a billion dollars is out of reach, but if one were to discount that by about 20%, it was achievable.
"With the leveraging capabilities in the infrastructure management, focus on SMB sector and new verticals, Zensar is expected to grow at CAGR of 30%, which would take its sales turnover to about Rs 5,000 cr by 2016," says Vijay Dave, senior analyst- retail desk, Sunidhi Securities & Finance.
This would fall short of the projected target by a few hundred crore, subject of course, to exchange rates. Kotak's Shah points out that the biggest challenge for the company is to manage the challenges of scaling up from its current size.
"Managing the employee base and increasing the management bandwidth to cater to this kind of growth will be important. The company will need to develop competencies in the ar eas that it wants to focus on and move up the value chain. In areas like cloud, social media and mobility, it will have to build scale and start to distinguish itself given the intensity of the competition," he says.
Zensar too is aware of the challenges that lie ahead, with employees being a critical one. The company has put in place a number of initiatives that ensure employee engagement remains high, and the company's attrition levels are lower than industry standards.
The company has recently started holding a Tech Fest internally where various groups within the organisation come together and talk about some of their new initiatives which have helped them gain a competitive advantage. Some of these are picked up by other units of the business.
For instance, a knowledge management tool built for Cisco is now being rolled out to other clients. Another successful insurance innovation is being implemented internally within Zensar. Steps like this ensure that the company as a whole benefits from the competitive advantage its specific units may have. What seems to be working in Zensar's favour is that it continues to acquire clients and stickiness is fairly high.
Natarajan is pragmatic enough to agree that they may or may not make this self-imposed deadline. With a number of external influencing factors which could swing either way, any target can seem like a long stretch. However, he remains confident that even if the billion dollar mark may take a little longer to reach, Zensar will emerge a holistically better organisation in the process.
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CA. Rajesh Desai
Rajesh Desai
Zensar Tech eyeing acquisitions in USD 30-40 million space
Software services provider Zensar Technologies is scouting for acquisitions in the USD 30-40 million range and a deal is likely to be done in 2013-14, Ganesh Natarajan, CEO and vice chairman, told moneycontrol.com on Monday.
Software services provider Zensar Technologies is scouting for acquisitions in the USD 30-40 million range and a deal is likely to be done in 2013-14, Ganesh Natarajan, CEO and vice chairman, told moneycontrol.com on Monday.
"We have two investment bankers looking for USD 30-40 million companies in SAP and IM (infrastructure management). Right now we are still in discussions. We have evaluated some 7-8 companies, not really found it to be a perfect match. So next year, I hope to do an acquisition. In FY14, we should be able to do a USD 30-40 million deal, that's very much on the cards," he said in an interaction.
Many IT companies saw slow growth last year, amid the overall global economic uncertainties and slowdown in client spending. However, most including Zensar feel that 2013-14 will be much better than 2012-13.
Natarajan said that he has just returned from US and UK and feels that demand environment currently is "superb."
"If you take the five key markets, US is looking good, UK is a little slow, but will definitely be double digit next year. Then South Africa is doing very well for us. The only slow area is Japan at this point of time. So all in all we are looking at at least a 15 percent volume growth for FY14," he said.
It currently has a pipeline of over USD 140 million of new business, he added.
Manufacturing and Insurance are two dominant verticals and the company also does work in retail sector and just started healthcare. These four verticals are expected to drive growth for Zensar. Currently 70 percent of its revenue comes from the US market.
Manufacturing and Insurance are growing at a healthy 22 percent and 18 percent respectively, but the banking and financial services continues to clock sluggish growth, Natarajan said.
The RPG Group company's third quarter net profit declined 7 percent year-in-year (up 51 percent sequentially), while revenue rose 9 percent (down 2 percent quarter-on-quarter) to Rs 525 crore. EBITDA margin at 13.2 percent (down 130 bps YoY and 40 bps QoQ) was also under pressure.
"Third quarter was a problem because of two things. One is that two of our largest clients have these eight day shutdowns. Those are our most profitable clients. And second is that we have had a slowdown in the IM business. Two of our on-site IM clients decided that they would do the work offshore. So the onsite business shut-off during the quarter," Natarajan said.
He sees the third quarter performance as an "aberration" and sees earnings improve in the fourth quarter. He is still confident of achieving the earlier forecasted 25 percent rupee revenue growth in the current financial year.
He is expecting a "substantial rise" in profits next year and the overall pricing is also expected to improve.
Large Client Focus
Meanwhile, Zensar Technologies aims to increasingly focus on large clients and is therefore closing smaller projects, where growth opportunities and margins are limited. It has already shut down 75 small clients, resulting in reduction of 200-225 people and 50 more such small clients are expected to go.
"We are cutting off small clients, booking large orders. We are completely changing the complexion of our business. This point of time our cut-off is USD 200,000. We have got out of 75, there are still about 50 that we will probably get out off. That's why, the manpower additions will remain flat this year...Its gone well for us and you will see substantial benefits of that in FY14," Natarajan said.
This year it will end at 6,700-6,800 employees, same as last year. Next year, Zensar plans to hire 400-500 employees on a net basis.
Expansion
Apart from looking at acquisitions, Zensar is also looking at expanding its own operations here in India and overseas.
Zensar has consolidated all its Hyderabad properties into one place at the DLF special economic zone and is expanding into one more SEZ at Pune, where the current campus has been fully utilised. In FY14, the company is likely to expand its near-shore centres in Shanghai, China and West Borough, near Boston in the US.
It will also look at expanding in a tier III location back home in 2014. Most of its future expansion will only be in a SEZ, he said.
Zensar shares closed up 0.7 percent at Rs 251.60 on NSE on Monday. The stock has gained 40 percent so far this financial year.
"We view the business restructuring with optimism. However, we would like to see at least the initial gains from this, before becoming more positive on the stock. The uncertain macro may also sustain challenges on the revenue front," Dipen Shah of Kotak Securities - Private Client Research, wrote in a report on Jan 22, post Zensar's third quarter results.
Margins are also likely to be sustained at Q3 levels, he added.
Kotak Securities has a "accumulate" rating on the stock, with a target price of Rs 310.
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CA. Rajesh Desai
Rajesh Desai
Software services exporter Zensar Technologies has signed a five-year agreement with Assurant Health, a US-based provider of health insurance products, to provide information technology support.
"The relationship spans development, testing, maintenance, enhancement and IT support for a suite of business applications used by Assurant Health for policy administration, underwriting and claims processing," the RPG Group company said on Tuesday.
Ganesh Natarajan, Zensar's CEO, said that insurance and healthcare are both focus verticals for the company in North America and this deal falls in the "sweet spot" of growth.
The Pune-based company is scouting for acquisitions in the USD 30-40 million range and a deal is likely to be done 2013-14, Natarajan told moneycontrol.com, earlier this month. It is seeking to buy companies in the SAP and infrastructure management space.
Zensar Technologies aims to increasingly focus on large clients and is therefore closing smaller projects, where growth opportunities and margins are limited. It has already shut down 75 small clients, Natarajan had said.
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CA. Rajesh Desai
Rajesh Desai
Pune-based software services exporter, Zensar Technologies is planning to hire up to 650 people, including 300 freshers, in the next fiscal as the company is expecting to achieve higher than the industry average growth.
The company is present in four dominant geographies - America, Continental Europe, Africa and Australia, and these markets are fuelling growth.
Industry lobby National Association of Software and Services Companies (Nasscom) had last month forecast information technology IT exports to grow 12-14 per cent next fiscal, higher than the revised 10.9 per cent growth it predicted for the current fiscal on the back of economic recovery in the US and Europe.
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CA. Rajesh Desai