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* ZENT reported 1QFY24 revenue growth at 1.3% QoQ in constant currency (CC), in line with our estimate. Deal TCV rose 23% YoY to USD154m but fell 12% sequentially after a seasonal high in 4QFY23. ZENT again surprised on the margin front with a 420bp gain sequentially to 18.7% (est. 15.0%), as it trimmed employee and sales expenses despite revenue growth in 1Q.

* While revenue growth in 1Q was in line with our estimate, the management remains cautious about the near-term demand environment, citing challenges in verticals like H-Tech and Consumer and pressure on discretionary spending. ZENT management does not see the situation improving at least for the next two quarters. Given the challenging nearterm macro outlook, especially in key verticals like Hi-Tech, Manufacturing and Consumer (56% of 1QFY24 revenues), we expect FY24 revenue growth to remain muted (est. 2.5% YoY CC). Revenue growth should improve in FY25, as the expanded service portfolio starts delivering on growth. We factor in a modest USD revenue CAGR of 7.5% over FY23-25E.

* On the margin front, the company reported another stellar performance in 1QFY24, with a 420bp sequential improvement in EBITDA margin. Though margin improvement was strong, it was aided by a 100bp one-time gain from R&D credit and a 150bp gain from cuts in sales and marketing expenses, both of which are expected to reverse in 2QFY24. Moreover, 2Q will also see the impact of wage hikes. The management continues to target mid-teens EBITDA margin and reinvest above that level for growth. With strong margin gains, offshore effort shift and moderation in attrition (- 390bp), we expect ZENT to deliver 16.8% EBITDA margin in FY24. We increase our FY24/FY25 EBITDA margin estimates to 16.8%/16.3% from 14.7%/15.2%, resulting in an INR EPS CAGR of 35% over FY23-25E (partially on low FY23 base).

* The stock has run up meaningfully (2.3x in last six months) on the back of margin improvement. Given near-term challenges in a significant portion of its portfolio and limited upside on margins, we see current valuations at 18xFY25E EPS fair. Our TP of INR470 implies 18x FY25E EPS. Retain Neutral.

Strong margin beat led by sharp opex decline

* Revenue declined 1.6% YoY in CC terms. EBIT grew 115% YoY, while PAT fell 108% YoY.

* Revenue grew 1.3% QoQ in CC terms to USD149.2m (in line). Deal TCV came in at USD 154m (-12% QoQ/+23% YoY).

* EBITDA margin at 18.7% (+420bp QoQ) beat our estimate by 370bp, as employee costs declined 4% QoQ (270bp impact) and S&M declined 18% QoQ (150bp impact). ? PAT at INR1,562m (+31% QoQ) beat our estimate of INR 1,182m, led by operating margin expansion and higher other income.

* Cash and Investments stood at USD233.8m (18% of MCap).

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