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.