Neutral Zensar Technologies Ltd for the Target Rs. 730 by Motilal Oswal Financial Services Ltd
TMT drags the quarter
Maintains mid-teens margin guidance
* Zensar (ZENT) reported 2QFY26 with flat revenue growth (est. a decline of 0.5% CC). BFS/HLS grew 4.8%/3.9% QoQ CC, while TMT declined 10.2% QoQ CC. Deal TCV: Bookings came in at USD159m (down 8% QoQ/21% YoY), and the book-to-bill was 1.0x. EBIT margin was 13.7% (est. 13.4%), up 20bp QoQ. PAT stood at INR1,821m (flat QoQ/up 17% YoY), above our estimate of INR1,739m.
* For 1HFY26, revenue/EBIT/PAT grew 8.1%/11.5%/16.1% YoY. For 2HFY26, we expect revenue/EBIT/PAT to grow 9.3%/8.9%/8.6% YoY. Our TP of INR730 is based on 21x Jun’27E EPS. Reiterate Neutral.
Our view: Steady margin execution, but growth momentum yet to turn
* Weak growth as TMT softness offsets BFSI gains; seasonal moderation ahead: ZENT reported flat QoQ growth in CC terms during 2QFY26, as continued weakness in the TMT vertical offset steady growth in BFSI. In our view, the macro environment remains largely unchanged, with client caution on discretionary tech spends and deal delays post the ‘Liberation Day’ tariff. We expect 3Q to see typical furlough-related softness, though the impact should be relatively limited given the company’s reduced TMT exposure.
* TMT correction likely behind; Manufacturing and BFSI cushion growth: We believe the worst of TMT could be behind, as ZENT’s exposure has now declined to 20% (from 27% in FY24), cushioning its impact on overall growth. Ex-TMT, growth would have been ~4% higher. BFSI and Manufacturing continue to witness healthy traction, aided by vendor consolidation and modernization mandates, which should drive a steadier growth base in the coming quarters. A sustained recovery in TMT through 2HFY26 will be a key monitorable.
* Deal pipeline healthy, but TCV conversion pace remains key: Deal TCV stood at USD159m (-8% QoQ/-21% YoY), impacted by slower renewals and Europe’s summer-related decision deferrals. While the underlying pipeline remains healthy with a strong large-deal funnel, we think the conversion timelines will be critical to monitor. AI-led transformation programs are gaining traction (28% of total bookings vs. ~20% in 1Q), but we believe revenue conversion from these wins will take time to reflect meaningfully.
* Margins resilient despite wage hikes; mid-teens guidance maintained: EBIT margin expanded 20bp QoQ to 13.7% despite the impact of wage hikes (~USD3.2m). We think this reflects sound operational control, supported by higher utilization, improved offshore mix (54.2% vs. 50.3% YoY), and FX tailwinds. Management reiterated its mid-teens margin outlook, and we expect ongoing cost optimization to help maintain profitability even amid subdued growth. We estimate EBITDA margins at 15.5%/15.6% for FY26E/FY27E.
Valuation and change in estimates
* While we think the worst of the TMT correction could be behind, a sustained recovery is yet to materialize. Deal conversion delays and cautious discretionary spending could continue to cap near-term growth momentum. We await clearer signs of traction in TMT and faster deal-to-revenue conversion before turning more constructive on the stock. We keep our estimates largely unchanged. 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 INR730 is based on 21x Jun’27E EPS. Reiterate Neutral.
Revenue and margins in line with our estimates
* ZENT’s revenue stood at USD163m, flat QoQ in CC terms, in line with our estimates of USD162m. Reported USD revenue was up 0.5% QoQ.
* BFSI and HLS grew 4.8%/3.9% QoQ CC, while TMT declined 10.2% QoQ CC.
* Deal TCV: Bookings came in at USD159m (down 8% QoQ/21% YoY), and the book-to-bill was 1.0x.
* EBIT margin was 13.7% (est. 13.4%), up 20bp QoQ.
* In 2Q, the total headcount reached 10,550 (down 0.6% QoQ). LTM attrition was 9.8%, stable QoQ. Utilization rose 50bp QoQ to 84.8%.
* PAT stood at INR1,821m (flat QoQ/ up 17% YoY), above our estimate of INR1,739m.
Key highlights from the management commentary
* Cost optimization and productivity-led programs are seeing stronger traction, supported by cloud modernization, cybersecurity, and early generative AI initiatives.
* Clients remain cautious in their discretionary technology spending; however, AIled investments are being prioritized, while non-AI discretionary spend remains subdued.
* Management indicated that 3Q is typically a seasonally weak quarter for the industry due to furloughs, though the impact on ZENT is expected to be relatively lower this year given the reduced exposure to the TMT vertical.
* AI-infused deals contributed 28% to total bookings vs 21% in the prior quarter, reflecting growing client interest in AI-led transformation.
* Deal renewals were lower as renewals typically occur in 4Q and 1Q, while the summer period in Europe also contributed to slower decision-making.
* Margins are expected to remain in the mid-teens range going forward, consistent with recent quarters.
* TMT: The sector remains under pressure as client budgets shift from opex to capex (notably into GPUs and data centers). ZENT’s TMT exposure has declined from 27% of revenue in FY24 to 20% in the current quarter, which should limit future impact relative to peers.
* H1-B dependency remains very low (less than 3% of the workforce). The company continues to focus on local hiring, with minimal impact expected from visa-related policy changes next year.
Valuation and view
* While we think the worst of the TMT correction is largely behind, a sustained recovery is yet to materialize. Deal conversion delays and cautious discretionary spending could continue to cap near-term growth momentum. We await clearer signs of traction in TMT and faster deal-to-revenue conversion before turning more constructive on the stock. We keep our estimates largely unchanged. 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 INR730 is based on 21x Jun’27E EPS. Reiterate Neutral.
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