Buy Zensar Ltd For Target Rs.630 by Motilal Oswal Financial Services Ltd
Broader growth, measured recovery Margin expansion to be limited by wage hikes
* Zensar (ZENT) reported 2QFY27 revenue growth of 4.1% QoQ CC (est. 2.4% QoQ CC). BFSI/HLS/MCS grew 7.1%/2.4%/2.9 QoQ CC, while TMT declined 2.2% QoQ CC. Deal TCV bookings came in at USD152m (up 1.5% QoQ/down 4.5% YoY), and the book-to-bill was 0.9x. EBIT margin was 13.4% (est. 13%), up 70bp QoQ. Adj. PAT stood at INR1,901m (up 3.5% QoQ/up 4.4% YoY), above our estimate of INR1,876m.
* In INR terms, 1HFY27 revenue/EBIT/adj. PAT grew 10.2%/9.3%/2.7% YoY. In 2HFY27, we expect revenue/EBIT/adj. PAT to grow 13.1%/6.7%/-4.3% YoY. We reiterate our BUY rating with a TP of INR630, implying a 16x FY28E EPS.
Key highlights from the management commentary
* Macro conditions remained broadly unchanged, with clients staying measured on spending and long-term commitments.
* Committed spending are being directed at embedding AI into core operations, with a focus on service quality and measurable returns.
* Management expects deal sizes to keep shrinking as AI cuts effort and timelines, leading to muted industry order books.
* Q3 outlook looks better than prior years despite furloughs, helped by lower TMT exposure and the large deal ramp-up.
* Revenue grew ~4.1% QoQ in CC to ~USD 166m, with BFSI contributing ~USD 5.5m of the ~USD 6.7m sequential increase.
* Growth was broad-based across volumes, with all regions and three of the four verticals growing QoQ.
* Service lines now contribute ~72% of revenue, up ~420 bps YoY, led by products and platforms (~18% YoY) and data engineering and analytics (~13% YoY).
* Management expects order books to remain muted industry-wide, as smaller and shorter AI deals become the norm.
* Average deal tenure is largely unchanged, though some five-year contracts are now being signed as three-year contracts.
* Renewal win-rates remain close to 100%, and large deals are pursued selectively given margin dilution.
* Fixed-price and outcome-based contracts are expected to rise over the next 3-4 quarters, as T&M does not pass on AI benefits to margins.
Valuation and changes to our estimates
* ZENT’s 2Q performance indicates improving breadth in revenue growth, with HLS and MCS returning to sequential growth alongside continued momentum in BFSI. We expect BFSI to remain the key growth driver through FY27, supported by the ramp-up of the USD210m mega-deal, while the lower TMT revenue share should limit the drag from continued weakness in the vertical.
* While the demand environment remains measured, the growth outlook is constructive, supported by the mega-deal ramp-up and improving performance across verticals. Margins are likely to remain range-bound within the mid-teen guidance, given wage hikes and continued investments, partly offset by operating efficiencies. We maintain our estimates and reiterate our BUY rating, with a revised TP of INR630, based on 16x FY28E EPS (earlier 15x).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
