Neutral Zensar Ltd for the Target Rs.750 by Motilal Oswal Financial Services Ltd
In-line quarter
Mid-teens margins guidance maintained
* ZENT) reported a good 1QFY26, with revenue growth of 1.9% QoQ CC (est. growth 1.0% CC). TMT/HLS grew 5.5%/5.2% QoQ CC, while MCS declined 4.1% QoQ CC. Deal TCV: bookings came in at USD172m (down 19.4% QoQ/up 11% YoY), and the book-to-bill stood at 1.1x. EBIT margin was 13.5% (est. 13.3%), down 40bp QoQ. The company’s PAT of INR1,820m (3.2% QoQ/15.3% YoY) was above our estimate of INR1,689m.
* For 1QFY26, ZENT’s revenue/EBIT/PAT grew 7.5%/9.4%/15.3% YoY. For 2QFY26, we expect its revenue/EBIT/PAT to grow 10.1%/11.8%/12.8% YoY. Our TP of INR750 is based on 21x FY27E EPS. Reiterate Neutral.
Our view: TMT recovery and deal TCV growth remain key monitorables
* Macro uncertainty weighs on budgets, but the TMT vertical shows signs of stabilization: Management flagged continued macro uncertainty, with the MCS vertical still under pressure. However, it indicated that the worst appears to be over for the TMT vertical (~22% of revenue). The company has added new logos and is also unlocking fresh areas of spending with a large TMT client. A sustained recovery in TMT through 2HFY26 will be a key monitorable. While near-term caution persists, management remains optimistic that FY26 overall growth will be better than FY25. We forecast a 6.0%/6.3% YoY growth in CC terms for FY26E/FY27E.
* Deal win trend softens sequentially: ZENT's deal TCV declined 19% QoQ, reflecting macro challenges and falling below the USD200m run-rate seen over the past three quarters. The company noted a growing share of managed services in net new wins, with longer deal durations. We believe this might hamper the ACV trajectory in the upcoming quarters.
* Mid-teens margin guidance maintained; 2QFY26 to witness headwinds: ZENT retained its guidance for mid-teen margins for FY26; however, roll-out of wage hikes and ESOPs will weigh on 2Q. While cost optimization initiatives are underway, the realization will have a lead-lag effect. In our view, a rising offshore mix should offer some margin support. We estimate EBITDA margins at 15.5%/15.6% for FY26E/FY27E.
Valuation and revisions to our estimates
* We believe macro headwinds and deal softness may weigh on ZENT’s nearterm growth. While the TMT vertical is showing early signs of recovery, we await sustained traction before turning constructive. We broadly maintain our estimates. We expect FY26/FY27 EBITDA margin estimates at 15.5%/15.6%, resulting in a PAT CAGR of 10% over FY25–27E. Our TP of INR750 is based on 21x FY27E EPS. Reiterate Neutral.
In-line revenue and margins; growth driven by TMT and HLS
* ZENT’s revenue stood at USD162m, up 1.9% QoQ in CC terms, in line with our estimates of USD160m. Reported USD revenue was up 3.3% QoQ.
* Growth was driven by TMT and HLS (up 5.5%/5.2% QoQ CC), and BFSI grew 2.9% QoQ CC, while Manufacturing and Consumer declined 4.1% QoQ CC.
* Deal TCV: bookings came in at USD173m (down 19.4% QoQ/up 11% YoY), and the book-to-bill was 1.1x.
* EBIT margin stood at 13.5% (est. 13.3%), down 40bp QoQ.
* In 1Q, total headcount reached 10,620 (down 0.8% QoQ). LTM attrition was 9.8% (down 10bp QoQ). Utilization was down 30bp QoQ to 84.3%.
* ZENT’s PAT of INR1,820m (up 3.2% QoQ/15.3% YoY) was above our estimate of INR1,689m for the quarter.
Key highlights from the management commentary
* The company anticipates some macro-driven variability in planned budgets.
* Despite ongoing political unrest and macroeconomic uncertainties, it remains cautiously optimistic about performance for the rest of the year.
* The right-shifting of demand highlighted in 4Q continues. Deal TCV was impacted sequentially due to this. Clients are focusing on cost-takeout projects.
* Large deals won earlier have started contributing to revenue.
* The company is committed to showing growth every quarter, although doubledigit growth for the full year remains uncertain.
* AI-driven deals account for ~20% of the pipeline. The average order book value is increasing.
* Large deals are increasingly driven by innovation and solutioning, rather than cost competitiveness.
* Vendor consolidation deals are won by a low-cost provider. The company has an adequate client share and is not proactively pursuing such deals.
* The onshore-offshore mix is driven more by client requirements than internal strategies. While offshoring supports margins, it can weigh on revenues.
* 2QFY26 will reflect the impact of wage hikes and ESOP-related expenses. The company maintains mid-teens margin guidance for FY26.
Valuation and view
* We believe macro headwinds and deal softness may weigh on ZENT’s near-term growth. While the TMT vertical is showing early signs of recovery, we await sustained traction before turning constructive. We broadly maintain our estimates. We expect FY26/FY27 EBITDA margin estimates at 15.5%/15.6%, resulting in a PAT CAGR of 10% over FY25–27E. Our TP of INR750 is based on 21x FY27E EPS. Reiterate Neutral.
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