Buy Zensar Tech Ltd For Target Rs. 1,000 By Choice Broking Ltd
Near-Term Delays, Profitability Intact
AI Tailwinds to Drive Long-term Growth; Near-term Growth takes a Set Back ZENT’s performance in H1FY26 remained constrained by tariff-related concerns, which weighed on client tech spending in the TMT and MCS verticals. However, easing macro headwinds in H2FY26, along with ZENT’s focused services-led growth, AI-driven solutions, and large deal wins, position it well relative to peers. Despite the near-term softness, the company remains committed to delivering sustainable, long-term profitable growth with mid-teen margin guidance supported by cost optimization initiatives. The near-term growth is likely to remain muted due to tariff concerns impacting the TMT vertical and delays in deal conversions. Thus, we expect Revenue/EBIT/PAT to grow at a CAGR of 9.0%/12.2%/14.7% over FY25–28E. Considering these near-term headwinds and peer valuation dynamics, we revise our target PE multiple downward to 25x (from 28x) and lower our Target Price to INR 1,000 (from INR 1,130), while maintaining our BUY rating based on FY27E–FY28E average EPS of INR 40.
Steady Q2 Performance Amidst Macroeconomic Weakness
* Reported Revenue for Q2FY26 stood at USD 162.8Mn up 0.5% QoQ and 4.2% YoY (vs CIE est. at USD 163Mn). The CC growth was up 3.4% YoY. In INR terms, revenue stood at INR 14,213Mn, up 2.6% QoQ.
* EBIT for Q2FY26 came at INR 1,948Mn, up 3.9% QoQ (vs CIE est. at INR 1,819Mn). EBIT margin was up 20bps QoQ to 13.7% (vs CIE est. at 12.8%).
* PAT for Q2FY26 came at INR 1,822Mn, remaining flat QoQ (vs CIE est. at INR 1,752Mn) led by lower other income.
AI-driven TCV reaches 28%; TMT Vertical Headwinds Remain ZENT's deal momentum is increasingly driven by AI, contributes 28% to TCV, up from 21% in Q1FY26. In Q2FY26, the TCV declined 7.7% QoQ to USD 158.7Mn, with deals focused primarily on vendor consolidation and outcome-based engagements. Amongst verticals, Q2FY26 saw sequential CC growth in BFSI at 4.8%, and Healthcare at 3.9%, while Manufacturing & Consumer Services (MCS) declined marginally by 0.6%. TMT vertical declined by 10.2% in CC terms, due to a secular trend across the industry where companies are shifting investment from Opex to Capex for areas like GPUs and data centers. TMT accounted for 27.1% of revenues in FY24, which has now dropped to 20% in Q2 FY26. The company’s strategy is to grow other parts of the business faster to reduce the exposure to the TMT vertical. Despite macroeconomic headwinds and cautious client spending, GenAI spends are strong and it's a key pivot for future competitiveness.
EBITDAM likely to Stay Within Mid-Teens Band ZENT's EBITDA margin in Q2FY26 was 15.4%, an increase of 20bps QoQ. Management stated they are deeply committed to deliver mid-teens EBITDA margins consistently and are not under-investing in sales, capabilities, or platforms. The company's strategy is to deliver higher revenues with less headcount additions by leveraging AI and maintaining high utilization rates (84.8%). Employee headcount stood at 10,550 as of Q2FY26, net reduction of 70. Voluntary LTM attrition stood at 9.8%, remaining stable QoQ.
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