Middle order is strong

SECTOR WATCH

Analysts add Zensar Technologies, CMC and Hexaware to their list of top picks from the mid-cap tech segment.

Sequels seem to be in vogue these days as far as movies are concerned. They matter when we try to the list top picks from the mid- and small-cap IT segments as well.

In The Smart Investor issues dated January 10 and 17, we presented a prognosis for the segment wherein analysts filtered out notable players in the space, concentrating on picks with sustainable business models which are value propositions.

Analysts recommended Datamatics, Geometric Software and i-flex Solutions though they said the money flowing into the sector raised the prices of stocks that may not deserve premium valuations.

This week they add Zensar Technologies, CMC and Hexaware to their list of top picks from the mid-tech segment.

Zensar Technologies
Zensar Technologies is a software solutions provider having presence in verticals like retail, logistics, manufacturing, financial services, telecom and utilities.

A joint venture of RPG Enterprises and UK-based Fujitsu Services, it has a marketing presence in US, UK, Germany, Sweden, Finland, Middle East, South Africa, Hong Kong, Singapore, Australia, Japan and China.

The company delivers services in enterprise applications, e-business and consulting for software processes. It registered good growth last year - its trailing 12-month revenues and profit increased 39.9 per cent and 87.18 per cent respectively over September 2003.

Reflecting the company's financial performance, the stock rose 39.8 per cent y-o-y over December 2003.

Analysts say the company's focus on increasing offshore revenues and balancing distribution of revenues between US and Europe coupled with good client addition and a steady rise in ODC (offshore development centre) customers helped it improve performance.

About 53 per cent of its revenues comes from US while 34 per cent comes from Europe. The company has seven ODC relationships with recognised names such as Cisco, P&O Nedlloyd, National Grid Transco and Fujitsu.

It is positioning itself as a migration specialist, using its proprietary solution called blue print methodology - a productivity enhancement tool - which helped it make inroads into Japan.

It also has a business process outsourcing (BPO) practice that added 10 customers in the latest quarter. Analysts are enthused about the company's impressive client base and margins.

Analysts favourably view Zensar's tie-up with the risk management subsidiary of the $85-million KeyBank to offer solutions for the implementation of Basel II norms (an international standard which states that banks must have a minimum capital adequacy ratio of 12.5 per cent).

Zensar has been jointly developing tools, models and methodologies along with KeyBank's subsidiary for the last one year, which were implemented at KeyBank.

It is planning to increase its focus on the BFSI (banking, financial services and insurance) space (accounting for about 10 per cent of the company's revenues) and this tie-up should help it ramp up its activities in this field.

In fact, the company plans to increase contribution from BFSI to 30 per cent by FY06 and targets revenues of about $2.5 million from this implementation service. 
 

Zensar Tech: Financials
(In Rs crore)	Q305	Q205	% Change
Net sales	47.91	44.28	8.20
Other income	1.92	0.46	317.39
Operating profit	7.94	7.29	8.92
OPM (%)	16.57	16.46	-
Net profit	6.23	4.92	26.63
NPM (%)	13.00	11.11	-
EPS (Rs)	2.66	2.10	-
Trailing 12-month P/E			14.60

Questions remain as to whether the company is going to sustain itself in the highly competitive field. However, considering that the company's Fortune 500 clients are scaling up their operations and BPO services are set to grow, analysts expect Zensar to report high growth in the future.

They say the stock is a good long-term play and investors should look to buy into it at lower levels. They peg an EPS target of Rs 15 for FY06.

CMC
One of India's major system integrators, CMC specialises in online and real-time systems as is evident in the large and complex projects executed by the company.

After being taken over by Tata Consultancy Services in 2001, the company has been aligning its global operations under the TCS brand name.

TCS - through its high visibility and strong international network - bids for projects on behalf of CMC. On winning the contract, CMC shares a part of the revenues with TCS. CMC's software products and competencies make its business model different from that of other IT firms.

It has four business units: customer service, system integration, ITES (IT-enabled services) and education and training. Analysts appreciate CMC's efforts to reorient its strategy for the international markets.

They bet on the company's strategy of making gains by replicating domestic projects internationally (it recently replicated BSE's BOLT - BSE on-line trading - system for the Kuwait Stock Exchange). 
 

CMC: Replicating success
Project	Original client	Replicated with
BOLT	BSE	Kuwait Stock Exchange
Biometric solution	Andhra police	Kenya police
Railway reservation system	Indian Railways	Syrian Railways
Port and cargo solution	Jawaharlal Nehru Port Trust	P&O (Europe)
Source: Stratcap Securities

However, analysts are convinced about CMC's execution skills and say though revenues may be a tad depressed in the coming two quarters, the company is going to record growth later.

Although margins have fluctuated between 7 and 2 per cent in the past, analysts expect them to settle in the 14-15 per cent range in the next one-and-a-half years.

On the valuations front, they say the stock looks attractive on the longer term, given that future earnings would be strong. On the flipside, margins have crashed and there are short-term revenue hiccups.

Analysts feel its parentage is a plus point which gives it the much-needed clout in marketing its products. They expect the stock to be rerated soon.

Hexaware
Hexaware has strong niches in PeopleSoft, airlines, and the German market. These augur well for the company in terms of specialisation, growth and euro inflows. No wonder that the stock is one of analysts' favourites.

Combine that with flexible client engagement models and margin expansion is imminent, say analysts. The company is a global provider of IT and process outsourcing services in the human resources arena.

It manages large IT applications in real time and provides services around packaged enterprise applications such as SAP (systems, applications and products) and PeopleSoft.

With 1,000 trained professionals, Hexaware's PeopleSoft practice is the largest among offshore peers and among one of the top five globally. In airlines, it works with four of the top 10 names, and has one of the largest offshore teams.

Analysts expect the company to double its revenues over the next two years on the back of larger projects and meaningful fixed-price contracts in the expanding offshore market.

Analysts bet on the SAP, business intelligence, and document and content management services to lead the growth story in the long term.

The multi-year contracts that the company has signed recently are a positive, but client concentration and concerns on the PeopleSoft ERP (enterprise resource planning) platform are a few grey areas, feel analysts. They peg an EPS target of Rs 42.6 for FY06.