Zensar Technologies Limited analyst Q&A

Shall we open the line for questions.

Yes.

The first question comes from the line of Sandeep Shah with Equirus Securities.

Congrats on a good execution in a difficult macro. Just wanted to understand, looking at the volatile macro and higher macro concern because of tariff, Manish, if you look at portfolio mix, we have concentration in manufacturing and consumer, which is 27% and Healthcare and Life Sciences is 10%. So roughly one third or slightly higher as a percentage to any other portfolio may have a direct impact of the tariff -related issue or other measures announced by the U.S. administration. So, are you worried in terms of growth entering FY 2026? Or you believe the order book, which has been really great in this year will help us to navigate these challenges?

Sandeep, first of all, thank you for the kind words on the results. See, as far as the macro is concerned, I mean, you would have heard from others also. So, there is the first order effect, which is likely to impact much more on manufacturing rather than consumer services. And fortunately, or unfortunately, our exposure to manufacturing and automotive is fairly limited. While for retail, it is slightly more. Of the 27%, I would say, majority is retail. So, we don't expect to be impacted as much. Healthcare and Life Sciences, again, I don't think there will be a significant downshift from a pricing from overall perspective, primarily because these are relatively price inelastic. I mean a person who has to get a shot has to get a shot irrespective of whether it costs $10 or $15. As far as the overall thing is concerned, I would say our order book is going to take us through first quarter or second quarter max of this year. And in fact, towards the end of the previous quarter, we started seeing some rightward shift of demand, not really cancellations, but rightward shift of demand. So from a demand perspective, I wouldn't say I'm concerned, but I would say that there is a lot of uncertainty, and it is the uncertainty that is concern.

Very helpful. Manish, last conference call, you also called out if there are no major macro headwinds, we may aspire to grow at double digit or close to double digit. That aspiration remains because macro headwinds has gone up. So is there a new outlook or aspiration target you want to disclose?

No, Sandeep, aspiration is always there. Whims and fancies of 1 quarter, 2 quarter or 2, 3 months here and there, I don't think we should be changing our aspiration. We might be changing what is realistic, but at least at this stage, I don't want to change my aspiration.

Okay. Okay. And last question, if I can squeeze in. Pulkit, just entering FY '26, margins could be maintained at close to mid-teens. What I wanted to know, apart from wage hikes, there could be incremental headwinds through ESOP cost. So, can you give inputs and takes in terms of entering FY '26 in terms of margin visibility?

So FY '26, I think our triangulation is to basically stick with mid -teens. And we would like to believe that mid -teens will give us adequate headroom on either sides. And hopefully, things will basically improve in the later part of the year, which should kind of further help us stick to this mid-teen outlook.

And any clarity on ESOP cost?

Pulkit -- the question is, have you taken anything on Q4?

Yes. So Q4, there is a marginal impact on account of ESOP, which has been absorbed and what you see is after ESOP being accounted for.

Next question comes from the line of Nitin Padmanabhan: with Investec.

Congrats on the strong deal wins. So, see, from a deal win perspective, if you could just lay some thoughts on how the pipeline has been looking like after the strong wins over the earlier quarters? And considering the environment, do you think that you will still be able to sort of deliver maybe 180 to 200 range? Or do you think that becomes a risk on a going-forward basis? The second is just a follow-up to what Sandeep was asking. Your thoughts from a TMT perspective as well.

Yes. So, on the first thing, our order book -- see a lot of this things started only in March or so. Things were very hunky -dory till end of January, mid -February or so. And we started seeing some rightward shift in demand when this started. The problem is that Nitin, as I said, problem is much more to do with uncertainty than -- I mean, nobody knows how the demand scenario will pan out because every day, things are changing. So one thing we are -- I'm quite sure that the capital allocation investment dollars, which used to come to IT are going to reduce in the short term because when the environment is uncertain, you don't want to do capital spending too much and which we are seeing even in TMT. Moving the needle to TMT. You would have seen that a lot of the cloud providers have cancelled or postponed their new data center projects. So the problem, Nitin, as I said, there's uncertainty. And it's very difficult to figure out what is going to happen because of the continuous change in shift in policies that we are seeing. So, I wish I could answer your question definitively. But I am -- I just go back to my original thinking, let's forget about the environment, let's make sure that we are executing to the best of our ability and let things play out.

Sorry for the technical issue. Manish, basically, I wanted to get your sense on a couple of things. Over the course of last couple of years, you have focused in terms of improving the mining within your existing customer base as well as expanding into or p ivoting the high-tech vertical towards a new set of customers. Could you talk about the progress on this front through FY '25? And how should we be thinking about this aspect going forward? And that's question number one. And the second question is with regards to our on-site offshore mix. Once again, that is a metric we've continued to show progression. How should we be thinking about this now given you've got to a level where we're almost on par with peers? Does it leave more room for improvement? Those would be my two questions.

All right. So question number one, how are we progressing . I think we are progressing well on account farming, and that is reflected in the fact that the number of $20 million account has increased from 4 to 6, if I'm not mistaken. And 5 to 10 also, there has been some increase. So we are pleased to see that we are making progress on cross -selling and account farming, but it remains a work in progress, and we have to continue to execute on that front. Your second part of your question was -- what was the second part?

Manish, this was about the on-site/offshore mix, we've seen continued improvisation of the...

Yes, I have said this before. Ultimately, we are a client -centric organization. We want to be a client-centric organization, and we are a client -centric organization. I am not going to push offshore if my client doesn't want it. I'm not going to push on-site if my client doesn't want it. So, it's not a parameter that I try and control too much. I would prefer that this be determined by what my customers need rather than by what we are trying to achieve . So I prefer to keep an eye on the margins rather than trying to marry too many parameters, looking at too many parameters and getting confused. And frankly, our on-site offshore ratio is not something that I consciously drive towards.

Next question comes from the line of Shradha with AMSEC.

Congrats, Manish and Pulkit on a good quarter. A couple of questions. First of all, how should we look at our South Africa portfolio given recent developments of U.S.A being stopped there and in light of the exchange movement also in that particular country?

Yes. So South Africa is a key, it's an important market for Zensar. It's one of the few markets in the world where we are in the top 3. Actually, our revenues from that market are higher than most of our peers, so to say. So we view the South Africa market is strategic from 2 perspectives. One is, a, we have a larger market share there and mind share there. So, we have the brand permission to do interesting and new things and try out new things and which then we use as case studies and so on to open new logos or existing logos within U.S. and Europe. So, from that perspective, South Africa remains a key market for us as per plan. And we continue to grow there. This year was a bit of an aberration. But otherwise, we continue to do well in that market. And we have made a change also. We have moved someone from India to take over that senior executive, Kaushik Chatterjee, has moved to South Africa or he is moving to South Africa to oversee that market.

Right. And in terms of demand, you indicated that you saw some right shifting of demand towards the latter half of March. But was there any change in demand trends in the month of April so far versus March?

No, so as I said, I mean, because of the uncertainty, I mean, even my clients don't know what is coming down the pipe, right . One day, there are reciprocal duties. Second day, there are no reciprocal duties. So most of my clients don't know what is coming down the pipe. And as I mentioned in the call earlier, at least from a first order impact perspective, our exposure to manufacturing and auto is fairly limited, okay. So, we are not impacted as much as some of the other players might be as of now. But the second order impacts, nobody knows just now. So as I told Nitin also, as much as I would like to be able to predict what is coming down the pipe, I don't think we are in a good position to see what is coming down the pipe.

Right. Just one last question, Manish. We've seen three back-to-back quarters of very strong TCV. I understand the macros have turned a bit volatile. But given if we see some improved macro conditions, do we expect a better TCV to revenue conversion maybe a quarter or two down the line?

Our TCV to revenue conversion is pretty high actually. So, if you look at last full year, the TCV reported is $774.6 million or something. And our revenues are in the $625 million range. And of this $770 million, I think $600-plus million has happened in the last 3 quarters. So, our bookings to revenue conversion is pretty phenomenal.

So, you would expect to maintain the same range rather than further improvement on this metric?

It's very good already. I don't think we should be looking at improving this metric.

Next question comes from the line of Amit Chandra with HDFC Securities.

Sir, my question is on the strong TCV number that you've reported. Obviously, the third quarter of strong TCV. So, in this number, was there any impact of any macro changes that started to happen at the end of March? And in terms of how we're progressing in April, you said that if we maintain this kind of TCV number, then obviously, our growth number would be like better than what we did last year. So, in terms of TCVs, if you can also indicate how is the pipeline looking in terms of large deals? And like what part of the pipeline is AI related?

So I don't know how many of you noticed there was this press release that we did on Tesco infrastructure thing. So that was a large deal by our definition, and that's why it was a material deal, so we reported, in the press release. So one reason for the good performance on the order bookings is that deal overall. Regarding April, I mean, frankly, I have not looked at the April numbers very seriously as far as order bookings are concerned because mostly these numbers get finalized towards the end of the month when we close our books. So I cannot give you a very definitive answer on that. But from a pipeline perspective, I don't think there is any significant material change that we see as of now.

Okay. And on the AI part, what part of the pipeline or deal TCV is linked to AI -related initiatives?

So incidentally, we have just started tracking this metric and I wanted to do it for 2 quarters before I start announcing it to the street as to what percentages we are looking at . Because currently, this was the first quarter we did it, and there was no benchmark available to do it. But needless to say, that in every deal, we are tracking how much -- whether the deal is AI influenced or whether that deal is selling of AI -related services and so on. And we are tracking it closely. Hopefully, over the next couple of quarters, we will start reporting that number also.

Okay. And on the TMT vertical, obviously, we have started to see some kind of stability there. So, is it fair to assume that the issues related to top line is mostly behind? And in terms of the macros, which is not deteriorating, we will not see any further issues in the TMT vertical. And also in Healthcare, Life Sciences and MCS, like you mentioned th at we don't have exposure to the verticals which are directly stressed to a higher extent. So like what's the reason for weakness in MCS in this quarter?

So MCS reason for the weakness, see, again, this is all relative. So first, I'll take TMT. Don't read too much into TMT numbers because the growth there is furlough related, okay . Q3 has a lot more furloughs in TMT than Q4. So please do not read too much into those numbers. MCS, we were coming off a growth of about 6.5% sequentially quarter-on-quarter. There was a budget flush and holiday retail -related spending at a couple of accounts, which helped us. And obviously, things caught up a littl e in this quarter, and the same was the case with Healthcare and Life Sciences.

Okay. And lastly, on the margins. Obviously, you said that the margins have been stable at around 15 % levels, and we are planning it to take it to mid -teens. So in a scenario where we don't see any growth acceleration, then also in that scenario, we have levers to maintain the margin at these levels?

Mid-teens

See I don't mention. Yes, Pulkit, go ahead.

So, they are in mid-teen range. And I think we plan to basically keep them in the same mid-teens range going forward as well. And anything over and above that will get invested back in the business. And that's what we've been kind of working towards, yes.

Next question comes from the line of Sandeep Shah with Equirius Securities.

Yes, Manish, just wanted the update in terms of how many large deals we have signed in FY '25. And if I'm not wrong, the definition is about $25 million. And how do you see the pipeline of large deals entering FY '26? And do you believe FY '26 could be a better year in terms of large deal closure versus FY '25 because that effort and focus has just started in between FY '25?

Yes. So, I would say two, is what I remember and I definitely hope that FY '26 will be better than FY '25.

Okay. And any commentary on our pipeline? How does it look like on a large deal?

See large deals, see there are two types of large deals. One, where things are coming as RFPs in the market. And second is where you have to create large deals. So the pipeline for where we are trying to proactively create large deals is very good. The pip eline for RFPs where anyway the probability of selling is very low, that is fairly muted, and that has been muted for us for quite some time.

Okay. Okay. And just on clarity, is later part of the March has seen some delay in decision making and right shifting. Do you believe this may have a full quarter impact in April, May, June? Or you believe deals which we have signed, scheduled to start on a desired dates in terms of ramp-up?

So the short answer is that what I was expecting, say, in January to do in Q1, I don't think that we will be doing that number in Q1, okay . But when you look at the next quarter, you always have an aggressive number in mind subject to conditions being stable, but the conditions have changed. So, I don't think that we are going to do what we thought in January that we will do in this quarter. But whether we are going to have growth or not, I can say that at least as of now, I see growth ahead in Q1 also.

Next question comes from the line of Nitin Padmanabhan with Investec.

Sorry, I kept getting disconnected. So I don't know if you have answered these questions. But broadly from a -- I just wanted your thoughts on whether the deal pipeline has sort of increased or gone down? And second, I wanted your thoughts on how is the uncertainty sort of manifesting in your portfolio right now? Are you seeing sort of pauses, delays? And is that quite meaningful in April? So that's the other bit. And yes, so those are the 2 basic things. I think you did mention that as of now, it looks like we have growth. But if you could just contextualize these 2 things, it will be helpful.

Yes. So I answered Nitin, unfortunately, you got disconnected at that time. So I answered that pipeline as of now and pipeline is a very large number that we track. So there is not much of a material change in the pipeline situation. But there is some amount of right shifting of demand that we saw in March which we are continuing to see in April, okay. So hopefully, all this trade- related stuff is going to get resolved soon enough. But as I said right in the beginning, the macro is not very strong. And that is reflecting in what we are seeing also.

Next question comes from the line of Girish Pai with BOB Capital Markets Limited.

Manish, you guys have struck a deal with Tesco. I think you mentioned it is an intra deal. Was it a vendor consolidation deal? And if so, what were the considerations that led Tesco to choose you versus an existing vendor, an incumbent vendor?

No, actually, this was a business separation that Tesco Money Services still was doing. And so there were some existing vendors or whatever, but we are actually setting up a complete greenfield environment for the separated business. So , you can think of this as, if you do a separate business, you do a transition service agreement, and then you get time to get the new thing going before you switch off from the transition service agreement. So that is what exactly we are doing in this.

It's a greenfield implementation.

Okay. Will you be onboarding the employees of Tesco? And will that -- or will there be any knowledge transfer period...

This has no re-badging. This is a new implementation.

Okay. Okay. Any vertical outlook you can give for FY '26? How do you think various verticals will play out?

Well, at this moment, we seem to be doing very well in BFSI. We seem to be doing quite okay in MRCL, which is manufacturing, Consumer Logistics and Healthcare, Life Sciences. And we seem to be flattening out in TMT. So this is the situation as of -- as things stand today. Things might change over the next couple of months, but that is how things look like as of today.

Okay. My last question has to do with compensation. Have you decided to increase compensation this year? And would -- if that does happen, would it be around the same time you generally do it? And will the quantum be the same?

No. We announce our compensation salary hikes effective 1st July. And typically, unless the sky falls on our head, we try to make sure that we take care of our employees and give adequate salary hike as we go along. So yes, we have budgeted some amount of salary hike for this year, but let's see how the market turns out in the next couple of months.

Okay. One last question, if I may squeeze that in. Everybody seems to be interested in an initiative on the GCC side. Do you people have anything on that particular front?

They are invested in GCC now. We have been doing GCCs for the last 2 years. And at least we are partners with at least 3 or 4 GCCs. And we have a very unique proposition on GCC, which is resonating very, very well with our customers. And we have success stories, case studie s to prove why we are the best in GCCs that are out there. And if there is a GCC deal in which we are invited, there is a very, very high probability that we end up in the top 2, if not win it outright.

Okay. I just wanted to understand, if GCC more about staffing and staff augmentation or you said you'll do something unique? What exactly would that be?

So I think see GCCs, I don't want to give out a secret sauce. But it is -- I would say, while our competitors look at GCCs as staff augmentation, we look at it as creating the right experience for the parent organization and also for the employees of the GCC. So that is what we do in this, but I don't want to let out a secret sauce. If you have any clients who are interested, I'm happy to walk them through our proposition.

Next question comes from the line of Naveen Baid with Nuvama Asset Management. Naveen Baid Just wanted to check, I joined the call a little late. Was there any component of pass -through revenue for the quarter?

Pulkit, you want to take that?

Yes, I'll take that. So while you may see traded goods, but it's not pass through because it's part of the overall deal construction, mostly managed services kind of transactions. I'll give you the exact number in few seconds. Do you have any other questions apart from that? Naveen Baid No, that's it.

1.6 million.

In general, we don't recognize resale revenues. So what we do, if you're doing some resale and all we are doing net accounting. In cases where we are doing complete managed services where licenses etcetera also in scope, in that case only we do account.

Next question comes from the line of Manik Taneja with Axis Capital.

What was the adverse impact of lower number of working days in JFM. And how does this arithmetic stack up when you think about the same dynamics for April, May, June compared to...

Vijay you are the specialist on this, I guess. So, you will have to take this.

Yes. So, look, I think in the Q1, there is a higher number of working days. And the impact is very difficult to predict right now given the fact that I think there are still a lot of volatility in terms of client budgets and stuff like that. And for us, I think many of the things that we have is fixed capacity/fixed milestone -based stuff. So that will not be impacted by the number of working days.

Sure, Vijay. I understand that. But if you can just help us understand because my sense is there is at least two more working days in April, May, June. I know there are a lot...

So, look, the working days is different across different geographies. If you look at Europe, this quarter, much lower. U.S., I think, is whatever, one extra days. And in India, we have 2, 3 days. So yes, it varies. And depending on the business mix, where the work happens, yes, we will obviously get the corresponding benefit of the revenue numbers because of the higher working days in T&M.

Next question comes from the line of Devendra Vikharankhar, an individual investor.

I just wondering your partner with Tesco, that Tesco, how much revenue will be generated and when it will be commissioned?

So, we do not give revenues.. We do not call out any client-specific revenues. So sorry, we'll not be able to take that.

Yes, Manish, with the uncertainty that is there, has the competitive intensity gone up? And have players started bidding more aggressively on whatever business is out there?

If the demand shrinkage happens, then the competitive intensity will go up without a doubt. So -- but again, it is too early to call it out. Remember, the tariffs first major disruption has been caused by tariffs, which were first really announced at a global level only on April 2. And today is April 25. So, it is difficult to -- and there also, there is a lot of uncertainty. But I can tell you that if there is a demand compression, then competitive intensity will increase.

Okay. You also take some examples of Gen AI where you've generated significant amount of productivity gains for customers. So, are the savings being plowed back into something new? Or are the savings going somewhere else like giving out big dividends or buyback of shares and something like that? Or it still remains in the IT services spend area?

So, it depends, first of all, whatever are the benefits, we will always share it with the client. We will not -- I mean no client will allow you to -- the industry is relatively mature. No client will allow you to make abnormal gains overall on a consistent basis. So, we are using AI primarily as a differentiator and as a competitive tool to win against competition and to create an enriching experience for our clients and our employees. So, at this stage, it is too early to say that there are some significant benefits which are coming to our bottom line. If that was the case, we would have actually increased our margin percentages, but that is obviously not the case.

No, no. I wasn't discussing about benefits to you. I was talking of savings generated for customers and the customers are reinvesting that into IT services? Or is it going somewhere else?

So, what AI is doing really is one is projects which are marginal from a business case perspective. If you lead with AI, then it is easier to make the business case for them. So, for clients, certain marginal projects become attractive to do if you use AI. So that is one thing that is happening. Second is the savings that the client is generating is mostly going towards IT itself. It is not that it is going towards -- I mean, it depends on the business case, obviously. But mostly, it is . I mean, nobody is saying -- nobody -- no client is going and -- no CIO is going to tell -- going and telling his Board that you can cut my budget now that I have started using AI. So, at a macro level, you can say that mostly if there are -- if you're delivering IT savings, that is being reinvested in the IT side of the business.

Next question comes from the line of Nitin Padmanabhan with Investec.

We are actively looking at acquisitions, but the uncertainty works both ways. And if there are attractive assets available because of the uncertainty, then I also need to take care of the uncertainty on my side, right. And we are a publicly listed company. We have to deliver quarter- over-quarter. We are not a private equity -driven enterprise where you take 2, 3 years to turn things around. And hence, you can buy assets from the cheap and turn them around. So, uncertainty works both ways. While you might get assets on the cheap, but we also need to make sure that the cheapness is temporary, not permanent. And that is a difficult call to take. But to answer your question, we continue to look at assets on an ongoing basis. And if we find anything attractive, we will go for it. We have the cash on the balance sheet to make it happen.

Ladies and gentlemen, due to time constraints, we have reached the end of question-and-answer session. I would now like to hand the conference over to Mr. Manish Tandon for closing comments.

Thank you. I think, first of all, thank all of you for being here on this. I know it's a Friday evening in India, and I'm sure you have many more much better and interesting things to do. But as we close this year, I want to take a moment to acknowledge the well-rounded performance that we have delivered in a landscape marked by geopolitical uncertainty, shifting client priorities and macroeconomic pressures. Our organization derives confidence from our strong client satisfaction scores, robust order book and a healthy pipeline. Thank you very much, and please enjoy the rest of your evening, and have a great weekend. Thank you.

On behalf of HDFC Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.