Sales growth has been muted for all the IT companies but that doesn’t mean they are not adding new clients. Almost all the IT companies have reported very healthy order book, some even their largest ever. There is always a lag between signing up a new client and execution.
Now coming to margins, they are not really expanding, they are just normalizing. The reasons margin went south, for entire indian IT industry, in 2022 and 2023 were:
1- High attrition IT- Higher salary increments paid to existing staff to retain them
2- Higher bench- IT companies hired like crazy in 2021 in anticipation of more work post-covid which never materialized due to slow down in IT spend in their key markets (US, UK, Europe)
3- Higher subcontractor deployment- due to high attrition
Now that talent market has cooled with industry wide layoffs, companies are hiring less. Attrition has gone back to historical averages which means lesser salary increments. Subcontracting has also gone down. Finally IT companies are using automation to improve their operating efficiencies.
For Zensar 18% is their highest reported EBITDA and they are still not there yet. With further revenue growth, operating leverage might even take it above 18%. Given the cheapest valuation among their peer group I find the stock quite well placed.
Disclosure- Invested in stock since 2022 (at 250 level) and could be biased.
By the way I am among very few who has continuously increased his allocation to IT stocks in 2022 and 2023 even when celebrated fund managers were giving sell calls and telling everyone to avoid the sector. Some even said CHATGPT will kill the industry.
I have worked in IT industry for close to 20 years and have seen the cycles so was confident this one will reverse too. Some of my best returns in 2023 have come from IT stocks thankfully.
Subscribe To Our Free Newsletter |