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Upbeat performance

But Hi-tech concerns persist; reiterate Neutral

* ZENT reported a decent 3QFY25, with revenue growth of 0.7% QoQ CC (est. flat growth), driven by Manufacturing & Consumer services (up 6.5% QoQ CC) and Healthcare & Lifesciences (up 3.2% QoQ CC). Deal TCV came in at USD205.3m (up 1.7% QoQ/22.6% YoY). EBIT margin expanded 70bp QoQ to 13.8%, above our estimate of 13.2%. PAT of INR1,598m (up 2.6% QoQ/down 1.2% YoY) beat our estimate of INR1,431m, led by higher EBIT & other income. For 9MFY25, revenue grew 6.8%, whereas EBIT/PAT declined 5.8%/3.7% vs. 9MFY24. For 4QFY25, we expect revenue/EBIT/PAT to grow by 11.4%/10.1%/1.3% YoY. Our TP of INR850 is based on 23x FY27E EPS. Reiterate Neutral.

Our view: Strong deal wins in 3Q

* Growth (excl. Hi-tech) robust despite furloughs: ZENT reported decent overall growth, led by strong growth in Healthcare and BFSI. The TMT (Telecom, Media, and Technology) segment faced declined by 3.5% QoQ CC due to client-specific furloughs. Despite persistent issues in the top account, we believe ZENT’s execution is impressive, and as the company continues to diversify, growth should de-couple in the coming quarters.

* Deal wins healthy: ZENT achieved its highest-ever order book of USD205m in 3Q, with a book-to-bill ratio of 1.3x, supported by broad-based deal wins. Notably, this was the second consecutive quarter of more than USD200m in order bookings. Since ZENT’s practice of counting only signed statements of work ensures almost a 100% conversion rate, underscoring revenue predictability, in our view.

* Discretionary spending slowly coming back: Management noted that discretionary spending is gradually recovering. This recovery aligns with client interest in emerging technologies such as GenAI and Agentic AI, which ZENT has proactively embraced through its innovative AI solutions. Despite macroeconomic uncertainties, we believe early signs of client optimism suggest that discretionary spending could further accelerate if these technologies gain widespread adoption.

* Stable margins: Margins were impacted by SG&A (-180bp), which was offset by volume and utilization benefits (+10bp), higher leave utilization (+90bp), operational efficiencies (+80bp) and exchange impact on GM (+10bp). As a result, EBITDA margin expanded 20bp QoQ. We believe the new management has proven that it can deliver on margins.

* Hi-tech may continue to drag down growth in FY26E: We note the company’s impressive execution in banking, manufacturing, and healthcare, and expect ZENT revenue (excl. Hi-Tech) to grow by ~16% in FY26E. That said, a 10% decline in Hi-Tech could drag down overall revenue growth to 10% in FY26E. Hence, we sit on the sidelines.

Valuation and change in estimates

We expect ZENT to deliver EBITDA margin of 15.6%/15.9%/16.3% in FY25/ FY26/FY27. This will result in an INR PAT CAGR of 8.0% over FY24-27E. We have raised our FY25/FY26/FY27 estimates by ~5%, supported by a decent 3Q print in a seasonally weak quarter and a robust order book. Our TP of INR850 is based on 23x FY27E EPS. Retain Neutral.

Revenue largely in line and margins beat; TMT declined QoQ

* ZENT revenue stood at USD157m, up 0.5% QoQ in USD terms, ahead of our estimate of flat growth QoQ. Reported USD revenue rose 0.7% QoQ CC.

* Growth was driven by Manufacturing & Consumer services (up 6.5% QoQ CC), followed by Healthcare & Life Sciences (up 3.2% QoQ CC). TMT/BFSI declined 3.5%/1.3% QoQ CC.

* Deal TCV: bookings came in at USD205.3m (up 1.7% QoQ/22.6% YoY) and the book-to-bill was 1.3x.

* EBIT margin was 13.8% (est. 13.2%), up 70bp QoQ.

* In 3Q, total headcount increased by 2.7% QoQ to 10,517. LTM attrition was 10% (flat QoQ). Utilization was flat QoQ at 82.9%.

* PAT of INR1,598m (up 2.6% QoQ/down 1.2% YoY) beat our estimate of INR1,431m, led by higher EBIT and other income.

Key highlights from the management commentary

* Both farming (deepening existing client relationships) and hunting (acquiring new clients) are critical for building large accounts. Over the past two years, the company has significantly strengthened its farming efforts, successfully adding one client to the USD20m revenue bucket.

* Discretionary spending trends will align with emerging market trends. For example, if Generative AI (Gen-AI) gains widespread adoption, it could lead to a significant increase in discretionary spending.

* Order bookings were broad-based and did not include any large deals. However, the company is currently in discussions regarding 2-3 significant deals.

* The company is focusing more on building annuity revenue, which provides stability, rather than relying on discretionary spending. Large deals are a key avenue for this strategy.

* Depreciation as a percentage of revenue declined to 1.7% and is expected to remain at this level. The increase in SG&A expenses was attributed to higher investments in sales and marketing.

Valuation and view

* We believe the company’s exposure to the Hi-Tech vertical could continue to weigh on growth in the near term; however, it will be offset by a recovery in BFS. We have raised our FY25/FY26/FY27 estimates by 5%, supported by a solid 3Q performance (despite the impact of furloughs) and a robust order book. Our TP of INR850 is based on 23x FY27E EPS. Retain Neutral.

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