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AI-Led Growth Momentum Strengthens; Valuation Remains Attractive

Est. Vs. Actual for Q2FY27: Revenue: INLINE; EBIT: BEAT; PAT – INLINE Change in Estimates YoY post Q2FY27

FY27E/FY28E: Revenue: 2%/6%; EBIT: 9%/13%, PAT: 2%/-0.2%

Recommendation Rationale

* Strong Revenue Growth and Broad-Based Recovery: In CC terms, the company reported healthy revenue growth of 4.1% QoQ, supported by broad-based volume growth across geographies and three of its four key verticals. BFSI led the performance with 7.1% QoQ growth, driven by multiple client accounts and ramp-up of large deals. Manufacturing and Consumer Services, along with Healthcare and Life Sciences, also delivered positive growth. TMT vertical continued to remain weak, though management indicated that the weakness is moderating as the company’s exposure to the vertical is getting reduced sequentially. Moreover, lower TMT concentration is also expected to reduce the impact of seasonal furloughs in Q3FY27

* Smaller Deal Wins to Provide New Offerings & Expand Addressable Market: Despite flattish growth in TCV to US$151.5 Mn, management highlighted that AI-led engagements are typically smaller and faster to execute than traditional large outsourcing contracts. Around US$30 Mn of deals shifted in Q3 due to administrative documentation rather than delays in client decision-making. Zensar is also expanding its addressable market through industryspecific solutions and domain-led offerings. Hence, healthy deal wins and AI offerings are expected to unlock new opportunities in the long run.

* Outcome-based Engagement Model, Higher Utilisation & Increasing Headcounts to Offset Wage Hike Impact: During the quarter, EBIT margin expanded 67 bps QoQ to 13.4%, supported improvement in utilisation to 87.6%, higher volumes and lower ESOP costs. However, annual wage hikes across Q3 and Q4FY27 are expected to create a 150–200 bps margin headwind. Management intends to offset the impact through operational levers while maintaining its mid-teens margin guidance. With headcount increasing by 978 employees during the quarter, timely deployment of additional capacity into billable projects will offset internal headwinds

Sector Outlook: Cautiously Optimistic

Company Outlook & Guidance: Management refrained from giving any broader guidance. However, the company aims to sustain operating margins at a mid-teens level. It continues to prioritise innovation to drive value growth.

Current Valuation: 15x FY28E P/E (Earlier Valuation: 14x FY28E P/E)

Current TP: Rs 605/share (Earlier TP: Rs 580/share)

Recommendation: We recommend a BUY rating on the stock.

Financial Performance In Q2FY27, the company reported revenue of Rs 1,585 Cr vs Rs 1,421 Cr, up 11.5% YoY and 5.1% QoQ, led by higher utilisation and deal ramp-ups. EBIT stood at Rs 213 Cr, up 9.3% YoY and 10.7% QoQ despite higher subcontracting costs. EBIT margin was 13.4%, down 28bps YoY but up 67bps QoQ. Net income grew during the quarter to Rs 190 Cr. However, in CC terms, overall revenue grew by 4.1% QoQ and 2.0% YoY. Attrition stood at 9.3% on a TTM basis

Outlook

From a long-term perspective, Zensar Technologies appears well positioned to address client-specific requirements across high-growth verticals while maintaining a strong deal pipeline. We believe the company's strategic initiatives will support a gradual sequential recovery, improving visibility on revenue growth and strengthening confidence in its medium-term growth outlook.

Valuation & Recommendation

The company’s near-term outlook remains positive, supported by broad-based sequential growth, strong BFSI momentum and increasing traction in AI-led engagements. The shift towards Proof of Value projects and outcome-based contracts offers scope to improve deal conversion and capture productivity benefits. Currently, the company is trading at reasonable valuations of 15x/13x to its FY27E/FY28E Earnings, given its improving revenue momentum, strong cash and expanding AI-led capabilities. Consequently, we upgrade our rating to BUY and value the company at 15x FY28E earnings, arriving at a TP of Rs 605/share, implying an upside of 13% from the CMP.

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SEBI Registration number is INZ000161633