Stock Review: Zensar Technologies

THE stock of small-cap software services provider Zensar Technologies jumped to its monthly high of 164.50 on Monday after the company announced acquisition of a US company.

   The stock has underperformed the broader market over the past three months, following the company's subdued performance in the past two quarters. The stock has fallen nearly 9% during the period against the 6% gain in the benchmark Sensex. However, it may see some buoyancy in the future, given that the latest acquisition would help grow its services offerings.

   The acquired company, Akibia, is a pure-play infrastructure management services (IMS) provider with annual revenue of $100 million and operating margin of 10%. It offers network and security solutions in the IMS space. The company operates through its data centres spread across US and Europe.

   Post transaction, Akibia will become a new business unit within Zensar. The acquisition is a strategic move by Zensar, as the company intends to enhance its service offerings in the IMS and information security segment and Akibia is a key player in the space. Currently, IMS forms merely 8% of Zensar's net revenue. The deal is expected to increase the share to 30% by the next fiscal. Over 300 IM associates of Akibia will be integrated within Zensar.

   The acquisition would add new clients and services to Zensar's repertoire. It also expects to witness traction in the enterprise application business, which forms nearly one-forth of the company's total revenue.

   According to a recent Nasscom, Mickinsey report, India is expected to benefit from $13-15 billion of opportunities available in the remote IM space globally, which is equivalent to over 30% growth annually. Given this, Zensar is well poised to benefit from the opportunity in the coming quarters.

   At the current market, Zensar's stock trades at nearly five times its earnings for the trailing twelve months. This is at a discount to the P/E of 8-10 commanded by other tier-II IT players. With the acquisition, Zensar's stock may see some revision in its valuations in the future.