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Zensar – a good long term stock buy

Zensar helps to design, deliver, and grow digital products, services, and experiences to transform business. It also provides businesses speed and advancement with its cloud-native, full-stack, and data-driven practice. It also provides data Engineering and analytics strategies.

Zensar reported a strong 2QFY22 with a USD constant currency revenue growth of 12.3% QoQ and organic constant currency growth of 6.4% QoQ, ahead of Motilal Oswal’s estimate. EBIT margin declined by 300bp QoQ to 10.9% due to a salary hike and other supply-related factors. Deal TCV witnessed a strong recovery to USD188.5m (v/s USD97mn in 1QFY22), implying a book-to-bill ratio of 1.3 times.

Management commentary remains optimistic

According to the management of the company as highlighted by the Motilal Oswal report, growth was broad based across verticals. Its largest vertical – Hi-Tech and Manufacturing – has three sub-verticals of Hi-Tech, Manufacturing, and Emerging. The management has re-designed the vertical in terms of strategy and new offerings. The new operating structure is ready, and there will be an additional leadership team onboarding in 3QFY22.

The management expects the growth momentum to continue. However, 3QFY22 would have a seasonal impact from furloughs. The City of San Diego deal has been partially ramped up in 2Q and will witness a full ramp up in 3QFY22.

Valuation and view of Zensar

According to Motilal Oswal, the current valuation of 20x FY23E EPS is one of the lowest in its midcap coverage and is at a discount of 45% to its peer median valuation.

The brokerage expects revenue growth momentum to continue in 2HFY22 and FY23. “The new CEO led leadership team is in place and its growth strategy has delivered results. We expect sustained traction, despite margin falling to mid teen levels. The management expects margin to revert to high teens in the medium term. With a likely return to high-teens organic growth in FY23E (we estimate 19% YoY) on a good FY22 exit and a recovery in key accounts, we see potential for a significant stock re-rating as valuations catch up with its peer group,” Motilal Oswal has said.

Shares of Zensar was last seen trading at Rs 423 on the NSE.

Just a word of caution to our readers. While we do recommend stocks from brokerage reports, markets at these times are highly volatile due to detection of the new Covid variant ‘Omicron. Therefore, it is prudent not too invest lumpsum amounts at current stage.

Disclaimer

The stock of Zensar has been picked from the brokerage report of Motilal Oswal Financial Services. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Q3CY21 results of Varun Beverages Ltd.

According to the brokerage the company’s “Revenue from operations grew by 33.0% YoY in Q3CY21 to Rs. 2398 Cr led by 28.4% volume growth & 3.6% realisation increase. Volumes stood at 153.3 million cases in Q3CY21 as compared to 119.5 million cases in Q3CY20. Carbonated Soft Drinks (CSD) constituted 70%, Juice 5% and Packaged Drinking water 25% of total sales volumes in Q3CY21. On a two year CAGR basis, organic volumes grew at 11% CAGR. Realisation increase was largely driven by increasing realisation in international territories (~10%) despite a high proportion of water in the product mix. Gross margins contracted 278 bps mainly on account of higher PET & sugar prices, which have gone up by 18% & 2% YoY respectively.”

The brokerage has also said in its research report that “The company was able to save 163 bps in employee spends (percentage to sales) & 65 bps in overhead spend due to the operating leverage. EBITDA grew 30% to Rs 494.7 Cr. EBIDTA margins contracted 50 bps to 20.6%. Led by higher operating profit and a 26% dip in interest expense, PAT grew at a splendid 59.8% to Rs 257.9 Cr. The company has repaid Rs 600 Cr of debt in the last six months while current debt levels are Rs 2400 Cr. The average cost of debt for the company has come down by 100 bps in the last one year to 5.5%.”

According to the brokerage’s research report “VBL has planned to set up a new plant in the state of Bihar as it was unable to service the market in the region, leading to lower market share. Earlier, products were transported to Bihar from neighboring states to meet the requirement. With Bihar being one of the most populous states in India, VBL aims to capitalize on the growing demand in the region. The new plant is expected to be commercialized over the next 6-8 months (in CY22) at a CAPEX cost of Rs 285 Cr. Furthermore, VBL is setting up a new plant in Kutwa (close to the Pathankot facility) to manufacture PET bottles and closures. The new capacity is expected to be operational by Mar’22.”

Buy Varun Beverages Limited with a target price of Rs. 1073

HDFC Securities in its research report has claimed that “VBL has delivered a healthy revenue CAGR of ~22% over CY12-19 (pre-Covid), with 21% CAGR in domestic revenue growth, aided by 20% volume CAGR which again is driven by the acquisition of territories. The international business (~23% of CY20 revs.) has witnessed a strong growth of 23% CAGR over CY12-19, on a low base and with the entry in newer international markets. Likewise, it has delivered 36% PAT CAGR over the last 10 years. Going ahead, we expect VBL to report strong Revenue/EBIDTA/PAT CAGR of 24%/28%/51% over CY20-23E, driven by a) continuous focus on distribution expansion and sustained share gains from the consolidation of South and West territories, b) focus on expanding fast-growing NCBs through constant product innovation and new launches and c) healthy growth momentum in International business.”

The brokerage has also commented that “The company had been on an acquisition spree for last few years, which impacted its Free Cash Flow (FCF). However, with already 90% volumes of PepsiCo’s India beverage under VBL, the growth for VBL in the future would be largely led by the organic route in India. Improvement in capacity utilisation, margin expansion and consolidation of operations will lead to improvement in FCF going forward. It has repaid debt to the extent of Rs. ~2200 Cr over the past 2 years and with strong FCF generation, we expect a sharp reduction in debt over the next 2-3 years. Reduced CAPEX intensity and focus on debt reduction, better margins and improved asset turnover would lead to a steady improvement of ratios.”

According to the brokerage’s call “Improving financial strength, solid business model with well-established brand portfolio, along with robust growth prospects (low per capita consumption, favourable demographics, increasing penetration with rising electrification) makes VBL an attractive investment bet, in our view. We think the base case fair value of the stock is Rs 999 (32x CY23E EPS) and the bull case fair value is Rs 1,073 (34x CY23E EPS). Investors can buy the in stock Rs 908-916 band (29x CY23E EPS) and add more on dips to Rs 817-823 band (26x CY23E EPS). At LTP of Rs 912, it quotes at ~31x CY23E EPS.”

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

One of the extremely bold and positive initiatives by the Union Government – the Model Tenancy Act, 2021 has potential to bring about a change in the real estate scenario. The step among other things seeks to regulate the vast but scattered rental market in the country. It also encourages the landlords to rent out vacant premises thereby increasing the supply of residential units.

The explicit purpose of the model law is to regulate business of renting of premises, protect the interests of landlords as well as tenants and provide a credible mechanism for speedy resolution of disputes between the two parties. The objective is to be achieved by mandatory signing of rent agreement between landlords and tenants, and setting up of Rent Authorities, Rent Courts and Rent Tribunals for expeditious resolution of disputes. In addition, the model law also clearly spells out the rights and obligations of landlords and tenants.

What is the Model Tenancy Act?

After the passage of the law by the state or the UT, it would be mandatory for landlords and tenants to sign a Tenancy Agreement.

It would be obligatory on the part of the landlord and tenant to jointly deposit this agreement with the Rent Authority within two months of the signing from both parties involved. In case they fail to jointly inform the Rent Authority about the execution of the tenancy with the stipulated time, both parties will be required to do it separately within a month after expiry of the two-month period.

The mandatory signing of the Tenancy Agreement will make the relationship between landlord and tenant more structured, enforceable by the law and thus helpful for both the parties. Besides other things, the agreement will have to specify rent, period of tenancy and details about renewal and extension of tenancy as well as rent. The agreement itself is introduced to reduce the scope of unnecessary disputes between landlord and tenant.

Disputes, however, can still arise over the terms of the agreement and its implementation. The model law provides quite an elaborate mechanism for speedy resolution of the disputes.

Security deposit under the Model Tenancy Act

The model law also seeks to do away with the arbitrary practice of asking exorbitant security deposits by landlords from tenants, especially in large cities. Under the model law, the security deposit being sought by the landlord cannot exceed two month’s rent in case of residential premises and six months in case of non-residential property.

As the security deposit will be mentioned in the Tenancy Agreement, there is no way that landlords will be able to extract large security deposits from tenants who are often desperately looking for a place to live outside their hometown.

The security deposit, it has been specified, will have to be refunded to the tenant on the date of taking over vacant possession of the premises from the tenant, after making due deduction of any liability of the tenant.

It is to be noted here that Act will not apply to premises owned or promoted by the Central or State government, local authority, government undertaking, enterprise, a statutory body or Cantonment Board.

Premises owned by a company, University or organisation given on rent to its employees, premises owned by religious or charitable institutions or auqaf registered, too does not fall under the purview of the Act.

Conclusion

The Model Tenancy Act is a well thought out legislation which will encourage landlords to rent out vacant premises without any fear of losing control of them and on the other hand increase the stock of residential premises. It will also help the tenants to find suitable premises at reasonable rent.

However, everything would depend on how soon the state governments/UTs enact their own laws to implement the Model Tenancy Act, benefitting the landlords as well as prospective tenants. It is, in fact, going to be a win-win situation for landlords as well as tenants.

Vikas Wadhawan, the author of this article is the Group CFO, Housing.com, Makaan.com and Proptiger.com. The opnions mentioned above are that of the author and do not reflect the opinion of Greynium Information Technologies Pvt Ltd.