May 30, 2022

Zensar Technologies Limited: Ratings reaffirmed

Summary of rating action

Previous Rated Amount Current Rated Amount

Instrument* Rating Action
(Rs. crore) (Rs. crore)
Long-term/Short-term - Fund- [ICRA]AA+(Stable)/[ICRA]A1+;
177.00 177.00
based/Non-fund based reaffirmed
Long-term - Non-fund based 14.00 14.00 [ICRA]AA+(Stable); reaffirmed
Total 191.00 191.00
*Instrument details are provided in Annexure-1

Rationale
The rating reaffirmation factors in Zensar Technologies Limited’s (Zensar) established business position in the IT services
industry and steady performance in FY2022. Zensar posted ~13.1% of YoY core revenue1 growth in constant currency terms in
FY2022, supported by accelerated demand for digital services (cloud and digital transformation). The company's core revenue
contribution from digital services grew to 70.8% as of FY2022 from 54.5% in FY2020. The company reported sizeable order
booking of TCV2 worth $575 million in FY2022 maintaining a healthy mix of large and mid-sized deals supported by multiple
wins across verticals. Coupled with growth prospects of digital and cloud infrastructure services, and a focused effort to scale
up contribution from top-tier clients, this provides revenue visibility for Zensar in the medium term.
The ratings also factor in Zensar’s healthy financial profile, characterised by recurring free cash flows, strong capital structure
and comfortable liquidity position. The liquidity profile remains supported by sizeable cash and investments of $155.7 million
(Rs. 1,180 crore) as on March 31, 2022. Zensar recorded OPM of 15.5% in FY2022 versus 18.1% in FY2021, mainly due to
increased cost of delivery because of increased cost of hires to support growth as well as attrition rates and high wage hikes
for the last fiscal, coupled with investment in sales and marketing. Margins are likely to witness continued pressure in the near
team owing to wage cost inflation and normalisation of operational overheads. However, attrition levels are expected to start
tapering from the end of the current fiscal, as record net employee addition at the industry level in FY2022 is likely to address
the demand–supply gaps to a large extent. This coupled with better realisation and operational efficiencies is likely to support
the profit margins over the medium term.
The ratings remain constrained by the relatively moderate scale of operations and concentration on the US market (70.5% of
revenue in FY2022) compared to large domestic IT players. While increasing the scale and the size of its operations, a leveraged
funding structure for future acquisitions could materially impact the company's financial risk profile. Further, a large cross-
border acquisition would entail careful integration of operations to realise likely synergies. The company also faces stiff
competition from other prominent players in the global IT services industry, leading to limited pricing flexibility. Additionally,
industry participants, including Zensar, continue to face challenges in the form of foreign currency fluctuations, talent
acquisition and retention. The demand for IT services remains exposed to macro-economic uncertainties in Zensar’s key
operating markets of the US, Europe and South Africa.

The Stable outlook on the rating reflects ICRA’s opinion that Zensar will continue to benefit from its established business
profile, healthy order book position and favourable demand outlook of the industry.

1 Adjusted for Third Party Maintenance (TPM) business which was sold off in FY2021
2 TCV- Total Contract value

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 Key rating drivers and their description
Credit strengths

Diversified presence across various service lines and verticals – The company’s revenues are diversified across various service
offerings, such as the digital application services (DAS) and digital foundation services (DFS). Further, its clientele is distributed
across the manufacturing (industrial and hi-tech), consumer services, and banking and financial services (BFSI) domains,
resulting in sectoral diversification. The BFSI and consumer services verticals reported healthy growth of 24% and 27% YoY,
respectively, supported by healthy industry demand for digitalisation, investment in sales and marketing teams and
strengthening of client engagement across major accounts. Growth in Zensar’s manufacturing vertical (generated 49% of total
revenues in FY2022), meanwhile, was moderate at 4% YoY owing to project closures and stable revenue from its top client.

Part of a large, established, and diversified Group imparts financial flexibility – Zensar is part of the ~Rs. 263 billion (FY2021
revenues) RPG Group, which has a diversified presence in infrastructure, tyres, technology and pharmaceuticals. It derives
financial flexibility and benefits from the strong management lineage of the Group.

Healthy order book and favourable industry demand outlook provides revenue visibility – Supported by the healthy demand,
the company secured sizeable new orders in FY2022, translating into TCV worth $576 million in FY2022. The order inflow has
a healthy mix of large and mid-sized deals supported by multiple wins across verticals. Also, in Q4 FY2022, ~40% of the deal
wins were from new clients. Coupled with healthy demand outlook for digital and cloud-based services, this provides revenue
visibility to the company.

Strong financial profile characterised by healthy cash flow generation, robust capital structure and comfortable liquidity
profile – The company’s financial profile remains strong as reflected in its high operating profitability, strong capital structure
and robust liquidity position in the form of a strong cash and investment balance of $155.7 million (Rs. 1,180 crore) as on
March 31, 2022. Zensar posted ~13.1% of YoY core revenue growth in constant currency terms and healthy operating margin
of 15.5% in FY2022, supported by accelerated demand for digital services (cloud and digital transformation). Going forward,
the financial metrics are expected to be in line with past trends and remain healthy backed by revenue growth and healthy
liquidity position.

Credit challenges

Relatively moderate scale of operations and geographical concentration risk compared to large IT companies – With
revenues of Rs. 4,243.8 crore in FY2022, Zensar’s scale of operations remains more moderate than some large domestic IT
players, thereby restricting its pricing flexibility and margins. Zensar’s geographical revenue trend is in line with the global IT
services industry, with the US being its largest revenue generator. With 70.5% of its revenues being derived from the US market
in FY2022, followed by Europe (18.1%) and Africa (11.5%), Zensar’s revenues and earnings are exposed to the structural and
region-specific challenges in the US.

Industry specific challenges like intense competition, forex risk, high employee attrition and exposure to policies in key
operating markets – Given the intense competition in the industry, Zensar’s profit margins are susceptible to pricing pressures
and wage inflation. Further, much of the revenues and margins are exposed to forex risks, although the company’s hedging
mechanisms mitigate the same to an extent. Being in a highly labour-intensive business, the availability and retention of a
skilled workforce are the key challenges. Zensar’s margin has been impacted in FY2022, owing to increased cost of delivery

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 because of considerable wage cost inflation. The LTM3 attrition as on March 31, 2022 was 27.9%. However, attrition levels are
expected to start tapering from the end of the current fiscal, as record net employee addition at the industry level in FY2022
is likely to address the demand-supply gaps to a large extent. Zensar is also exposed to macroeconomic uncertainties and any
adverse regulatory/ legislative changes in its key operating markets of USA, Europe and South Africa.

Liquidity position: Strong

Zensar’s liquidity is strong with healthy estimated fund flow from operations (FFO) of Rs. 500-530 crore in FY2023, aided by
steady revenue growth and operating profitability. The liquidity is also strengthened by sizeable cash/liquid investments of
$155.7 million (~Rs. 1,180 crore), healthy unutilised working capital limits as on March 31, 2022, and with no debt repayment
liability. ICRA expects the company to continue to scout for investment/acquisition opportunities to support its inorganic
growth initiatives. The impact, if any, of the same on Zensar’s credit and liquidity profile will depend on the ticket size of these
investments/acquisitions and their operational and financial synergies.

Rating sensitivities

Positive factors- A rating upgrade for Zensar is unlikely in the medium term given the moderate scale of operations. However,
the ratings could be upgraded if the company demonstrates significant improvement in its scale of business, supported by
growth across verticals.
Negative factors - Negative pressure on Zensar’s ratings could arise in case of sizeable debt-funded acquisitions, which could
significantly impact the financial profile and liquidity position. Specific credit metrics that could lead to a downgrade of Zensar’s
ratings include Total Debt/OPBITDA (debt including lease liability) exceeding 1.25 times on a sustained basis.

Analytical approach

Analytical Approach Comments

Corporate Credit Rating Methodology
Applicable Rating Methodologies Rating Methodology for Entities in the Information Technology(IT) Services
Industry
Parent/Group Support Not applicable
For arriving at the ratings, ICRA has considered the consolidated financials of
Consolidation/Standalone Zensar. As on March 31, 2022, the company had 15 subsidiaries, which are listed
in Annexure-2.

About the company

Zensar is a mid-size IT software and infrastructure services and solutions provider with industry expertise across manufacturing
(Hitech and Industrial), retail, insurance, banking and financial services. The company delivers comprehensive services for
mission-critical applications, enterprise applications, business intelligence and analytics, business process management and
digital services. Zensar has operations across the US, the UK, Europe and South Africa. Zensar is a part of the diversified RPG
Group with a presence in infrastructure, Tyres, technology, and pharmaceuticals.

Zensar's comprehensive range of software services and solutions enable its more than 140 customers to cross new thresholds
of business performance. The company is present across the whole value chain of IT and IT enabled services from IT consulting,
application development and maintenance to package implementation and BPO operations.

3 Last twelve months

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 Key financial indicators (audited)
Zensar - Consolidated FY2021 FY2022
Operating Income (Rs. crore) 3,781.4 4,243.8
PAT (Rs. crore) 307.0 421.7
OPBDIT/OI (%) 18.1% 15.5%
PAT/OI (%) 8.1% 9.9%
Total Outside Liabilities/Tangible Net Worth (times) 0.4 0.4
Total Debt/OPBDIT (times) 0.5 0.5
Interest Coverage (times) 12.8 18.6
PAT: Profit after Tax; OPBDIT: Operating Profit before Depreciation, Interest, Taxes and Amortisation
Note: PAT is after exceptional losses and Debt includes lease liability

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years

Chronology of Rating History
Current Rating (FY2023)
for the past 3 years
Amount Date & Rating Date & Date & Rating
Instrument Amount Outstanding as in Rating in Date & Rating in FY2020
in FY2021
Type Rated of Mar 31, 2022 FY2022
(Rs. crore) (Rs. crore) March 25,
May 30, 2022 - Feb 25, 2020 Dec 27,2019
2021
Long-
Fund term [ICRA]AA+ [ICRA]AA+ [ICRA]AA+ [ICRA]AA+
1 based/Non- and 177.0 - (Stable) - (Stable) (Negative) (Stable)
fund based short /[ICRA]A1+ /[ICRA]A1+ /[ICRA]A1+ /[ICRA]A1+
term
Non-fund Long- [ICRA]AA+ [ICRA]AA+ [ICRA]AA+ [ICRA]AA+
2 14.0 -- -
based term (Stable) (Stable) (Negative) (Stable)
Complexity level of the rated instrument
Instrument Complexity Indicator
Fund based/Non- fund based Simple
Non-fund based Very Simple

The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's
credit rating. It also does not indicate the complexity associated with analyzing an entity's financial, business, industry risks or
complexity related to the structural, transactional, or legal aspects. Details on the complexity levels of the instruments, is
available on ICRA’s website: www.icra.in

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 Annexure-1: Instrument details
Date of Issuance Coupon Amount Rated Current Rating and
ISIN No Instrument Name Maturity Date
/ Sanction Rate (Rs. crore) Outlook
Long-term/Short-term
[ICRA]AA+(Stable)/
NA Fund based/ Non-fund NA NA NA 177.0
[ICRA]A1+
based
Long-term - Non-fund
NA NA NA NA 14.0 [ICRA]AA+(Stable)
based
Source: Company

Please click here to view details of lender-wise facilities rated by ICRA

Annexure-2: List of entities considered for consolidated analysis

Company Name ZENSAR Ownership Consolidation Approach
Zensar Technologies Inc. 100% Full Consolidation
Zensar Technologies (UK) Ltd. 100% Full Consolidation
Zensar (Africa) Holdings (Pty) Ltd. 100% Full Consolidation
Zensar (South Africa) (Pty) Ltd. 75% Full Consolidation
Zensar Technologies (Singapore) Pte. Ltd. 100% Full Consolidation
Foolproof Ltd., UK 100% Full Consolidation
Foolproof (SG) Pte. Ltd. 100% Full Consolidation
Cynosure Interface Services Private Limited 100% Full Consolidation
Keystone Logic Mexico S. DE R.L. DE C.V 100% Full Consolidation
Zensar Technologies GMBH 100% Full Consolidation
Zensar Technologies (Canada) Inc. 100% Full Consolidation
Zensar information technology B.V 100% Full Consolidation
M3Bi India Private Limited 100% Full Consolidation
M3Bi LLC 100% Full Consolidation
Zensar Colombia S.A.S 100% Full Consolidation
Source: Company data

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RELATIONSHIP CONTACT
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