Buy Megasoft + Zensar Technologies

Megasoft Ltd reported good set of numbers for the 3Q of CY07; consolidated revenues for the company stood at Rs.768mn, with Visual’s contribution being Rs.180mn. The consolidated PAT stood at Rs.163mn. The company witnessed healthy traction in the telecom products segment and margin improvements across both products and services.

The telecom products business to spur revenue and profit growth for Megasoft in CY07, with de-focus on the lower margin services business. Expect Megasoft to report a consolidated revenues of Rs.2.87bn in CY07, up from the Rs.1.78bn in CY06. The consolidated entity is expected to post net profits of Rs.530mn in CY07 (Rs.330mn, CY06) that would translate into an EPS of Rs.11.6 per share in CY07. Management expects profits to further grow to Rs.1bn in CY08. Kotak recommends a BUY with a target price of Rs.167, the stock will trade at 14.4x its consolidated CY07 earnings.

Zensar Technologies:
Zensar’s revenues grew by 2% on a QoQ basis, PAT was up by 6% QoQ. The company improved the EBIDTA margins by about 78bps despite the rupee appreciation and salary hikes given during the quarter. Company hopeful of achieving Rs.700 mn PAT in FY08. Kotak foreecasts PAT of Rs.586mn; an EPS of Rs.24.5. Earlier EPS estimates @ Rs 28. The reduction is due to the weakening of USD.

In line with revised earnings estimates, we revise our DCF – based price target from Rs.314 to Rs.284.