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Focused services & AI-led large deals to drive growth

ZENT’s performance in H1FY26 is expected to be constrained by tariff-related concerns, particularly affecting client tech spending in MCS vertical. However, easing macroeconomic headwinds in H2FY26, along with ZENT’s focused services led growth & strong TCV conversion, sets it apart from peers. The company’s focus on AI-led & large innovative deals rather than vendor consolidation strengthens its position. Recent launch of its GenAI accelerator, Zen’s AI, is gaining traction. As tech spending rebounds, we believe ZENT is well-positioned to win large deals & outperform its peers. Based on these factors, we maintain our BUY rating & as we roll forward to FY28 estimates, we lower the PE multiple to 28x (earlier 30x) & consider average FY27E & FY28E EPS of INR 40.3 to arrive at our Target Price of INR 1,130.

Strong Q1 performance amidst looming uncertainty

* Reported Revenue for Q1FY26 stood at USD 162Mn up 3.3% QoQ (vs CIE est. at USD 159Mn) led by focused services growth of 5.9% QoQ. CC growth was 3.8% QoQ. In INR terms, revenue stood at INR 13.9Bn, up 1.9% QoQ

* EBITDA for Q1FY26 came at INR 2.1Bn, down 0.9% QoQ (vs CIE est. at INR 2.2Bn). EBIT margin was down 40bps QoQ to 15.2% (vs CIE est. at 15.8%).

* PAT for Q1FY26 came at INR 1.8Bn, up 3.2% QoQ (vs CIE est. at INR 1.8Bn).

AI-driven TCV reaches 20%; robust cash flow calls for strategic M&As:

ZENT's deal momentum is increasingly driven by AI, which fuels 30% of its active pipeline & contributes 20% to TCV. In Q1FY26, its TCV rose 11.7% YoY to USD 172Mn, with a strategic shift towards innovative large deals over vendor consolidation. Deal tenures are lengthening due to more complex, high-quality engagements, including managed services, resulting in higher ACV. Vertically, Q1FY26 saw sequential CC growth in Telecom, Media & Technology (5.5%), BFSI (2.9%), & Healthcare (5.2%), while Manufacturing & Consumer Services (MCS) declined 4.1% after previous strong quarters & early tariff impacts. However, a Q2FY26 rebound is expected in MCS, though uncertainty lingers beyond. Europe shows promise with anticipated recovery post one-off distortions, & Africa’s new senior leadership is sparking early positive signs. Despite macroeconomic headwinds & cautious client spending, GenAI remains in high demand & is seen as pivotal for future competitiveness. Moreover, the company holds a strong cash balance of USD 315.7Mn as of Q1FY26 out of which a USD 29Mn dividend is pending & will be paid out soon. The prudent cash strategy supports potential M&As & upfront investments in innovative large deals in future.

EBITDAM likely to stay within mid-teens band: ZENT's EBITDA margin in Q1FY26 was 15.2%, a 40bps QoQ drop primarily due to increased sales, marketing, & travel costs. Despite upcoming headwinds in Q2FY26 from annual salary hikes (approximately USD 3Mn impact) & potential ESOP & ASR costs, management remains committed to maintain margins in the mid-teens range. The company's strategy is to deliver higher revenues with less headcount additions by leveraging AI, maintaining high utilization rates (84.3%). Moreover, ZENT saw its LTM attrition rate improve to 9.8% from 9.9% sequentially. The headcount in the quarter stood at 10,620 as on Q1FY26.

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