ZENSAR TECHNOLOGIES: Northward Bound

Success in joint ventures, especially cn the information technology area is a
rarity in India. In the past, due to restrictive government regulations, many
MNCs set up JVs with Indian business houses both to comply with these
regulations and also be able to cope with the complexities of operating in
India. Among the major JVs were HCL with HP, Tata with IBM and Digital Equipment
with Hinditron Group. In most of the cases, as the ventures became established
and the Indian economy opened up, the continued presence of the Indian partner
was no long required and over a period of time the MNC partner took over the
management of the venture.

Consequently during the nineties, most the MNCs who came into India preferred
to set up their 100% subsidiaries both for manufacturing and software
development. This trend is however changing with the ongoing BPO boom and many
global corporations are considering JVs in India as the vehicle for their BPO
operations given the high level of expertise India has already developed in this
area. Among the few successful JVs that has survived these turbulent times is
Pune-based Zensar Technologies.

Zensar Technologies was initially the software services subsidiary of Pune-based
listed company Fujitsu ICIM that was mainly operating in hardware related areas
and a joint venture between Fujitsu and the RPG Group. By the year 2000, Fujitsu
ICIM sold of its hardware business to the Chennai-based Accel group and became a
shell company with Zensar Technologies as its subsidiary. Eventually, Zensar
Technologies was merged with the parent company on 16 August 2001 and started
trading as Zensar Technologies. Currently, RPG group and Fujitsu Services UK
hold 30% of the equity stake in Zensar Technologies whereas Electra Partners UK
holds 22% stake. The company had a staff strength of 1,502 professionals as on
September 2003, across 23 locations delivering both offshore and onsite
solutions.

For the financial year ended March 2003, the company reported a 22% increase
in revenues at Rs 228.4 crore as against Rs 186.7 crore for the year ended 2002.
There was a similar percentage increase in net profits of the company at Rs 9.9
crore as against Rs 8.1 crore for the previous year. The company focuses on
three main technology domains, Oracle Financials, Microsoft and IBM with
strengths in verticals like retail, telecom, BFS and manufacturing. Offshore
revenues contributed 32% to the total revenues of the company improving from 24%
achieved in the previous year. The year also saw the company’s foray into
China with a joint venture with Asia Logistics Technologies. The 50:50 joint
venture with Asia Logistics Technologies signed in August 2003 will focus on
software business based on Oracle applications in the Chinese market. Zensar’s
key clients include companies like Sprint, Cisco and Global Payments in the US;
Nokia, Sandersons, P&O Nedlloyd, and Transco in Europe; Ingersoll Rand in
Hong Kong; Liberty Insurance and IBM Alliance in South Africa; Oracle Asia
Alliance in Singapore; and Kirloskars and Garware in India, apart from Fujitsu
which is a sharehoder in the company. Among the recent client acquisitions
include Sanmina—SCI Corporation, Videojet and Electronic Arts in the
Enterprise Applications area where the company is expected to undertake
substantial expansion of operations. The company along with Fujitsu has jointly
bagged a project from the State Transit Authority in Australia to develop a new
system offshore. Recently its Chinese joint venture Hanzen Technologies
Consulting achieved a breakthrough by getting two contracts in the software
quality consulting area from a Chinese telecom company. Zensar expects the
operations based in Shenzhen will have 50 people on board by March 2004.

Zensar Technologies reported software revenues of Rs 63.9 crore for the
quarter ended September 2003 as compared to Rs 57.2 crore in the last quarter,
up 12%. Compared to the same quarter last year this was higher by 11%. The
company achieved net profits of Rs 2.02 crore for the third quarter, down 36%
over the immediately previous quarter and down 15% than the same quarter last
year. Net profit was low due to expenses related to significant ramp up of
employees wherein 191 employees were added during the quarter, which is the
highest-ever quarterly addition as well as build up of BPO processes. Business
operations in the US contributed 53% to revenue, while 32% was contributed by
Europe and the balance 15% was from rest of the world. During the quarter, the
company also bagged four multi million dollar deals and expects to add 500
software engineers during the current financial year to service these contracts
successfully. During the quarter, the company also acquired the assets including
a 250-seat facility in Bangalore and business prospects of Suntech Data Systems
to establish itself in the BPO space. The company also proposes to set up a
development center at Kharadi Software Park near Pune with an investment of Rs
35 crore.

The ongoing recovery in the global economy as well as the
increased emphasis on outsourcing is now increasingly being reflected in company
results. We believe that Zensar is likely to show upwards of 20% sales growth in
the current and subsequent years. During the last one year, the company has also
reduced its geographical concentration as well as acquired new clients that have
diluted client concentration as well. Improving offshore contribution to sales
and increased intake of people indicates improving fortunes. Another positive
development in the company’s operations is the focus on knowledge management
and verticals that will enable the company to position itself as a premium
provider of services. However, these moves will take time to show up in the
margins that remain relatively low as the company remains saddled with some low
rate contracts and will need to hold a bench for offshore and BPO services. In
the longer term however, margins are expected to improve as the BPO operations
stabilize and new contracts come on stream.

The shares of Zensar are currently traded at Rs 84,
discounting its FY03 EPS by 19 times and FY04 EPS by 15 times respectively. We
believe that the company’s strong client base, improving topline and
bottomline growth and increasing offshore contribution to revenues justify a
better discounting and as the technology recovery gathers momentum, Zensar stock
should continue its northward journey. Market Outperformer.

Sushanto Mitra
is the founder of
Technology Capital Partners

The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here