Add Zensar Technology Ltd For Target Rs.550 by Choice Institutional Equities Ltd
Near-term Growth Muted; Medium-term Outlook Intact
Q1FY27 was largely in line, with revenue growth continues to be soft, owing to weak discretionary spending, continued softness at a large TMT client and slower decision-making by clients. Margin was impacted by upfront investment in large-deal transitions and capability-building. While demand for AI, cloud, data and digital engineering remain healthy, deal metrics were relatively subdued, with deal TCV of USD 149 Mn. The management has indicated a FY27 book-to-bill ratio of 0.9x–1.1x, suggesting that the pace of recovery is likely to remain gradual. We expect recently signed large deals to contribute H2FY27 onwards, supporting a sequential improvement in growth and margin as transition cost normalises. Accordingly, we trim our FY27/FY28 earnings estimates by 2%/7% to reflect a slower recovery trajectory and value the company at 14x FY28 EPS to arrive at a TP of INR 550, maintaining our ‘ADD’ rating
In-line Performance, Margin Dragged Down by Large Deal Ramp-up Cost
* ZENSAR posted revenue of USD 159.5 Mn, up 0.7% QoQ and down 1.5% YoY (vs CIE estimate of USD 161 Mn). CC growth came in at 1.1% QoQ. In INR terms, revenue stood at INR 15,083 Mn, up 4.0% QoQ and 8.9% YoY (vs CIE estimate of INR 14,927 Mn).
* EBIT stood at INR 1,923 Mn, down 9.7% QoQ and up 2.6% YoY (vs CIE estimate of INR 1,920 Mn). Operating (EBIT) margin came in at 12.7%, down 194 bps QoQ and 79 bps YoY (vs CIE estimate of 12.9%).
* PAT came in at INR 1,837 Mn, down 12.8% QoQ and up 1.0% YoY (vs CIE estimate of INR 1,889 Mn) largely affected by the transition and early-stage execution for the large deal.
Soft Demand Persists; Deal Conversion Key to Recovery:
ZENSAR reported Q1FY27 revenue of USD 159.5 Mn, up 1.1% QoQ CC, with growth primarily driven by BFSI (+7.8% QoQ), while Healthcare (-4.1% QoQ), Manufacturing (- 2.8% QoQ) and Hi-Tech (-9.9% QoQ) remained subdued amid weak discretionary spending. The continued weakness at a large TMT client also remained a drag on overall growth in this quarter. Large-deal momentum remained modest, with TCV declining to USD 149 Mn sequentially. Further, the management's FY27 book-tobill estimation of 0.9x–1.1x suggests only a gradual improvement in deal conversion rather than a sharp acceleration. The management indicated that recently-signed deals are expected to ramp up meaningfully H2FY27 onwards. However, we believe, revenue recovery is likely to remain gradual, contingent on stronger large-deal closures, easing client-specific headwinds and improvement in discretionary spending.
Margin Weighed by Growth Investments; Recovery Expected H2FY27 Onwards:
EBIT margin declined to 12.7% (-194 bps QoQ; -79 bps YoY) as upfront investments related to large-deal ramp-ups, capability expansion and onsite delivery cost more than offset operational efficiency. The management reiterated that these investments are strategic and should normalise as recently won engagements transition into a steady-state execution. Continued automation, utilisation improvement and AI-led delivery efficiency are likely to provide incremental operating leverage in the next few quarters. We anticipate margin to expand progressively H2FY27 onwards as revenue conversion improves, transition cost normalises and large deals move into a steady-state execution.
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SEBI Registration no.: INZ 000160131
