Neutral Zensar Ltd For Target Rs. 740 by Motilal Oswal Financial Services Ltd
Steady momentum amid uncertain skies
Hi-tech & manufacturing vertical drags
* ZENT reported a decent 4QFY25, with revenue growth of 0.9% QoQ CC (est. decline 0.5% CC). BFSI/TMT grew 3.4%/1.7% QoQ CC, while HLS and Manufacturing declined 1.4%/2.6% QoQ CC. Deal TCV: bookings came in at USD213.5m (up 4.0% QoQ/17.6% YoY) and the book-to-bill was 1.4x. EBIT margin was 13.9% (est. 14.0%), up 10bp QoQ. PAT of INR1,764m (up 10.4% QoQ/1.7% YoY) beat our estimate of INR1,661m, led by other income. For FY25, revenue grew 5.4%, whereas EBIT/PAT declined 3.1%/2.3% YoY. For 1QFY26, we expect revenue/EBIT/PAT to grow by 7.0%/8.7%/9.1% YoY. Our TP of INR740 is based on 21x FY27E EPS. Reiterate Neutral.
Our view: Margins stay in range, growth investments cap upside
* Demand remains cautious, but auto and manufacturing risk manageable: ZENT is seeing some softness in demand, especially in manufacturing & consumer (down 2.6% QoQ cc; ~25% of revenue) due to global macro uncertainty and tariffs. That said, its exposure to autos is limited, and retail—which is a large segment for ZENT—should hold up relatively well. BFSI, meanwhile, remains a bright spot with robust growth momentum and healthy client mining. Despite the cautious tone, the company aims for better growth in FY26 than in FY25, near high single-digit levels.
* Strong deal momentum continues: ZENT hit a record-high order book in 4Q, with deal wins of over USD200m for the third quarter in a row. A key highlight: One client moved into the USD20m+ revenue bracket, due to deeper farming efforts. While the RFP pipeline is quieter, the team is making efforts, leveraging a client mining engine to proactively create larger deal opportunities.
* FY26 off to a slower start: While 1QFY26 may be softer than initially expected in Jan’25 due to recent macro shifts, ZENT expects the full year to be better than FY25. Growth is being driven by vertical-specific solutions and better account mining—especially in BFSI and healthcare. However, Hi-tech remains shaky with spending cuts from cloud players.
* Margins stable, with reinvestment mindset: ZENT held margins steady at 15.6% in 4Q. Improved utilization and cost control helped balance delivery and SG&A costs. Management is sticking to its mid-teens margin guide for FY26, and any upside will be funneled back into growth areas.
* Hi-Tech may continue to drag down growth in FY26: We note the company’s impressive execution in banking, and expect its revenue (excl. HiTech) to grow by ~10% in FY26E. That said, an expected ~8.5% decline in HiTech could drag down overall revenue growth to 6.0% in FY26E. Hence, we sit on the sidelines.
Valuation and change in estimates
* 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 keep our estimates largely unchanged. We expect ZENT to deliver EBITDA margin of 15.7%/15.9% in FY26/FY27. This will result in an INR PAT CAGR of 11.0% over FY25-27E. Our TP of INR740 is based on 21x FY27E EPS. Retain Neutral.
In-line revenue and margins; FY25 deal TCV up 11% YoY
* ZENT revenue stood at USD156.8m, up 0.9% QoQ in CC terms, in line with our estimate of USD156m. Reported USD revenue was down 0.1% QoQ. For FY25 revenue was up 5.4% YoY at USD 624mn.
* Growth was driven by BFSI and TMT (up 3.4%/1.7% QoQ CC), while HLS and Manufacturing declined 1.4%/2.6% QoQ CC.
* Deal TCV: bookings came in at USD213.5m (up 4.0% QoQ/17.6% YoY) and the book-to-bill was 1.4x. For FY25, deal TCV stood at USD774m, up 11% YoY.
* EBIT margin was 13.9% (est. 14.0%), up 10bp QoQ. For FY25, EBIT margin stood at 13.5%.
* In 4Q, total headcount reached 10,702 (up 1.7% QoQ). LTM attrition was 9.9% (down 10bp QoQ). Utilization was up 170bp QoQ at 86.4%.
* PAT of INR1,764m (up 10.4% QoQ/ 1.7% YoY) beat our estimate of INR1,661m, led by other income. For FY25, PAT stood at INR6.5b, down 2.3% YoY.
* The company declared an interim dividend of INR11/ share.
Key highlights from the management commentary
* The company expects a first-order impact on manufacturing due to macroeconomic uncertainty and tariffs. However, exposure to the auto segment is limited, and retail—despite high exposure—is not expected to be significantly affected. Healthcare is expected to face a relatively lower impact from tariffs.
* If demand contracts due to macro uncertainty, competition could intensify. ? All geographies reported growth in 4Q, supported by sustained margins.
* Good traction in mining and expanding existing accounts, with several clients moving into higher-revenue buckets.
* FY26 is expected to be better than FY25, though 1QFY26 may be softer than previously anticipated due to recent macro shifts.
* 4Q marked the highest-ever order book, reflecting strong client confidence and successful account mining strategies. No significant changes in the pipeline despite macro uncertainty.
* Mid-teens margin guidance for FY26 maintained, including ESOP costs, which have already been absorbed in 4Q margins.
* BFSI reported strong growth in 4Q, supported by robust farming and new account wins, and is expected to remain a key growth area.
* Growth continued in TMT as the furlough impact eased. The segment appears to be stabilizing.
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 keep our estimates largely unchanged. Our TP of INR740 is based on 21x FY27E EPS. Retain Neutral.
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