Zensar Technologies Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Devang Bhatt from IDBI Capital. Please go ahead.

So, one is that now you are stabilized your margins so when we will see a improvement in growth and which segments are you focusing to drive that growth and what are we doing to reduce the higher dependence on clients?

So, I think as far as this quarter is concerned except for the Hi-Tech segment and also there was a few specific client where because of the furlough and so on deeper and wider furlough we saw declines, but if you exclude that then all parts of our business have done better than last quarter. So, I'm pretty bullish about our growth prospects, revenue growth prospects as far as non-Hi- Tech vertical is concerned. Hi tech is under stress, it is under stress for everyone. I mean there are other verticals that are under stress for everyone like Banking and Financial Services which is doing well for us, b ut Hi-Tech we are also suffering and hope fully given that the furloughs should come down in this quarter hopefully the worst is behind us.

And sir as you highlighted that there are some headwinds in macro. So , what are we doing to mitigate the same I mean are we trying to grow that I mean some specific segments or some specific clients are you targeting?

I think first of all as I pointed out earlier, last year we have taken a lot of steps to manage and improve our client penetration and revenues. One is we have increased the addressable spend through addition of several Service Lines including Experience Services, including ESAS which includes Salesforce, Oracle, SAP and everything, and Advanced Engineering Services and we are seeing good growth in these new Service Lines that we have added. Besides that, I mean you have to stick to your core, client centricity , takes care of your employees, take care of your clients in tough times, then we'll see the benefit. Also, we are trying to ride on to the newer trends that we are seeing in the market like Generative AI and so on to see how we can piggyback on those trends and accelerate our revenue profile.

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Manish our deal wins have let us say on a trailing 12-month basis have sort of picked up it's up 23%. Just wanted your thoughts on a couple of things. So , one has the deal wins of Q1 and Q2 completely ramped up and do you think that the following quarter will be a growth quarter despite continuation of furloughs so that's the first one. The second is how are you thinking about Hi-Tech at this point in time, w hen do you see this sort of the trajectory sort of at least stabilizing is the second one and I have one more as well I'll follow up post this?

Yes Nitin. Good to hear from you. I think on the first question on deal wins as you can see compared to the same quarter last year our deal wins have gone up by $37 million and if you peel the onion a little bit more you will find that most of these deal wi ns are coming from Existing New which means that our farming engine what we had invested in is working to our satisfaction and that's very encouraging to see. The second question was, will the next quarter be a growth quarter or not? As you know we don't give projections for the next quarter. So, I cannot comment on it and 5 million plus clients have also gone up overall and what was your third question Nitin.

The third one was when do you think Hi-Tech can sort of stabilize and you seeing incremental deal wins at some point that will start offsetting the pain that you're seeing from the client?

I think look that’s a hundred million dollar question as to when we will see the thing, the Hi- Tech sector for everyone is under stress a nd even as we speak Nitin I was hearing that even Google has announced new job cuts and so on. I mean the jury is still out there, b ut as I said, except for Hi-Tech I see other parts of our business firing much better. So, as soon as this furlough impact etcetera a nd project clo sure impact etcetera goes away we should hopefully see growth.

And lastly, if you could give your thoughts on BFSI, Consumer Services and Healthcare as well on how are you seeing those sort of pan out?

So, for us BFSI has done pretty well. We have grown 12.6% year-over-year and Manufacturing, and Consumer Services also grew by 5.5% year-over-year and besides that we are doing well in UK and Europe and also in South Africa which are big markets for us. So, as I said I mean things are looking up except for the Hi-Tech vertical.

Thank you. The next question is from the line of Naveen Baid from Nuvama Asset Management. Please go ahead.

Just wanted to confirm on what was the order backlog this quarter?

Thank you. The next question is from the line of Sandeep Shah from Equirus Securities Private Limited.

Manish I think the pain in a Hi-Tech and that too from a top client within the Hi-Tech is a well accepted fact for Zensar and it's been accepted fact for the investor as well, b ut to surpass that we have to accelerate the pedal in terms of driving growth in other accounts in Hi-Tech and the other verticals, so are we geared for the same? do you believe the time has come in terms of driving this incrementally better and that will help us to compensate the headwinds comin g on the growth coming through Hi-Tech account year-after-year and quarter-after-quarter?

As I said e xcept for Hi-Tech as a vertical we are seeing secular momentum overall in other verticals and geographies. I mean, i f we continue to see significant s tress in Hi-Tech, I don't know whether the growth will be enough to offset or if Hi-Tech remains flattish or grows slightly then I see us growing significantly.

And sir what do you believe because the growth outside Hi-Tech in this quarter has been flat to a decline in trend except for the BFSI. So, is it largely because of furloughs?

Largely because of furloughs and this time the furloughs were much deeper and wider than what I have seen in the past few years.

Just a related question Manish do you expect some of these most of these f urloughs to reverse in the fourth quart er and Sachin if you can quantify the impact of furloughs on this quarter's revenue?

I will take the first portion of the stuff. I think we are seeing some sort of a mixed bag in terms of furlough reversal in Q4. Some of the sector s like Hi-Tech are going to continue to have furlough in the early part of the quarter whereas some of the other sectors are not going to have the impact of furloughs. So, there will be some impact of furloughs i n Q4 as well. Sachin, you might want to quantify.

So, Sandeep combination of furloughs and utilization has impact of close to 200 basis points on our gross margins and normally the data of the split we don't make it public.

And Sachin if I presume you said in the opening remarks provision for doubtful debts has been reversed in this quarter which impacted margin by 110 basis point to Qo Q positively. So, will this be a headwind in the coming quarter and if yes what could be the headwind impact?

Yes, obviously as you know PDD is a one time impact which we registered in Q3, but broadly other parts of our operational efficiency track continue to work. If you look at, let's talk about utilization in Q3 of last year , my utilization was below 78% i t was 77. 6%. This time my utilization is over 80%. So , there will be levers like this which will be available for us going forward.

And last thing on the depreciation there has been absolute decline, so any one of in the EBITDA margin, EBIT margin apar t from provision for doubtful debts led through depreciation or any other items?

See, depreciation has been impacted due to multiple facilities which we have be en vacating across the globe including India and US. So, the impact of that can be seen over there. Apart from that, the amortization of earlier acquired subsidiaries is also having impact over there, but I don't foresee a significant change in that number in near future.

Thank you. The next question is from the li ne of Nikhil Choudhary from Nuvama . Please go ahead.

First question is on top accounts, while Manish you mentioned that incremental PPP is coming from client mining, can you clarify is it coming from top five clients given we are seeing the contribution from top five continue to decline?

No, actually we are converting our lot of clients as we are moving up. To answer your question, it's obvious that it is not coming from the top five clients. The data shows that, but we are trying to move up the number of clients from bracket from less than 5 million to above 5 million, from less than 10 million to above 10 million and that is where we are seeing a lot of success.

Second is regarding the margin I think on margin you continue to surprise and even in this quarter despite of reversal we have seen margin EBITDA margin close to 17% and we have seen some of the levers like offshoring utilization clearly playing out in last few quarters. So, is it fair to assume the current quarters EBITDA margin will be what we can look forward to in FY25 and maybe next coming quarter?

So, it's very difficult for me to talk for FY25 and going forward I think our guided band has been 14 to 16 because we think that that is a more sustainable range which we can work on going forward because we still want to create as we've been saying, we are working on few of the large deals which will have impact on the margins in short run. Then obviously the enabling of the re-skilling of my delivery team is parallelly happening at the same time if you see my investments in S&M is also going up. So , this is the room which we have created to ensure that in long run it helps us to grow faster.

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

No, I don't think we can state anything or any large deal which will have impact on the margin just now. You have to build in the capability to do large deals right and as we all know well that the large deals typically are not very margin accretive in the initial stages. So , we have created that cushion. We also want to create some cushion to invest in sales and marketing and so on. So, that is what we are trying to do.

Thank you. We have the next question from the line of Vikas Ahuja from Antique Stock Broking. Please go ahead.

So, if I look at some of your peers their commentary has incrementally started turning positive and if I remember correctly in one of your interviews you have talked about demand continues to remain and mega deals are occurring, but you are also seeing an equ al number of that being cancelled. So, anything changed for us in last one and half months I mean things have incrementally turning positive for us?

As far as the macros are concerned , I don't think there has not been a material change in th e macros that we have been seeing over the last couple of quarters and I don't think it is materially going to change for the next two quarters also the overall macro.

And also, the other part regarding that mega deals you talked about that y ou have been seein g some cancellations on that side overall, anything has improved on that front as well?

No, actually what I was quoting was that for every two large deals getting signed, one existing deal is getting cancelled or something like that. So, that is what I had said, but we are at a stage where we have to first win some good amount of large deals and then hopefully we can comment on cancellations, but what I was commenting on was what I had heard in the industry discussions.

Thank you. The next question is from the line of Sandeep Shah from Equirus Securities Private Limited. Please go ahead.

Manish you might have answered this, but for a consistent growth for Zensar over the next three to five years, the three things might have to be addressed. One is the large deal team formation which caters to the pipeline and converts the pipeline faster. Second being the farming of the existing top clients or target clients and third being the hunting of must have clients on an ongoing basis and the fourth being having a required door openers or service capability in the portfolio across verticals. So, can you throw light whether Zensar has addressed all these four in terms of restructuring and reorganization or still some of this is work in progress and when do you expect these to get addressed and we can actually grow in line with the industry?

All these things have been addressed. Are they perfect? The answer is no. There's always room for improvement. So, from a strategy perspective all th ese four items have been addressed a nd we are seeing as I said we are seeing some green shoots, already our farming as I mentioned EN is the highest existing new deals is highest over the last few quarters which is a very encouraging sign and shows that farming is working. We have opened 9 Net New logos. Quite a few of them are Fortune 500 companies overall. So, all those things are happening. It is n ot that they are not happening, b ut you cannot be binary that either they are not happening or happening perfectly, so it is always a journey.

Thank you. The next question is from the line of Ganesh Shetty an Individual Investor. Please go ahead.

Sir, are you looking for any acquisition because we have got considerably cash and cash reserves and especially in Healthcare sector we are having less exposure, so whether this sector can be scalable through acquisition?

Yes, we are looking at all avenues including acquisitions . Almost every week we look at a possible acquisition target and the team is actively working on, but we'll not buy something just for the heck of it. So, where we see a strategic fit and the right price, I have a fiduciary responsibility to the shareholders to conserve cash and we continue to look, but we are not going to throw money at doing an acquisition if it's not worth it.

Sir my second question is regarding that Hi-Tech performance for last so many quarters. So, as we see no ray of hope in the near future, are we also planning to reduce some exposure like reducing our investment and deploying the resources in ever growing sector like BFSI and consumer, can you throw some light on this?

We always keep looking at our portfolio and we don't do it at a sector level, but we actually do it at an account level, and we go and see where we want to invest, where we want to maintain and where we want to divest. So , we continue to do all three and we do it at an account level instead of trying to do it at a sector level.

Thank you. We have the next question from the line of Jalaj from Svan Investments. Please go ahead.

Could you touch upon the sudden degrowth or rather than both life sciences and Hi-Tech, is it all the complete impact is because of the furloughs or are there some client specific issues or some project related issues there?

And could you touch upon the nature of the PDD which you talked about 110 bps in fact which vertical was it and some nature of to it color to it?

So, I won't be able to disclose i n which vertical it was and all, but what I can tell you that according to the accounting norms beyond certain days if the collection is not happening, so, we need to create a provision of the same in the books. So, according to our accounting policy we had created that provision in earlier quarters . In Q3 that collection actually happened. So , with the collection we had to reverse the PDD and that's where you are seeing 110 basis impact.

I just want to emphasize this is an ongoing thing there is nothing one time that we have done something or anything. This is we are just following our ac counting policies and showing you the impact that’s all.

Manish this would be for you maybe little long-term questions two, three years or five years down the line what as per you are what are you seeing as a growth driver for the organization and where are we moving maybe you could talk about some IG industry group level or a service line how do you see the growth coming out more from a drivers perspective?

One of the repositioning that we have done i s along the lines of Experience, Engineering, Engagement. We are perhaps the only company of our size which can do these all three things together and in sync with each other. As more and more digital projects are getting done, i t is not about just experience or j ust engineering or just engagement, but a combination of three and that is a unique value proposition that is resonating really well in our client base, it is helping us differentiate in the market. So, I am hoping and I'm seeing some green shoots there also that this overall strategy will get us to the growth and the top quartile performance that I'm looking at in the next three years.

Thank you. The next question is from the line of Sandeep Shah from Equirus Securities Private Limited. Please go ahead.

Manish one of the lead indicators for us to judge whether the strategy is running or not running could be tracking the deal pipeline. So , can you throw some light in terms of how the deal pipeline at the end of December looks like both on a QoQ and YoY basis, is it growing higher than your expectation or it's not meeting your expectations?

Yes, the deal pipeline is stable to better than same time last year. So, that's about all I can say because we do not disclose the numbers per say, but I can tell you that it's same or better as compared to last year.

Manish with regards to the offering or the repositioning you talked about, could you specifically touch upon the Healthcare vertical because I believe that in your previous role you have been managing the same. So , could you talk a little about the repositioni ng of us as a Zensar as a company and the industry trends there?

So, this is the second quarter since we have split out the Healthcare as a vertical , actually we were doing close to 9% to 10% of our revenues was coming from Healthcare and the obvious thing was that without focus this kind of revenue can be generated then with focus a lot more can be generated and that you would have seen in the results of the other players in the industry most of them have shown significant growth in Healthcare and life sciences. So, we have spun it off or we have created a new vertical and we will continue to invest in getting exceptional growth in this particular vertical a nd yes, I will use my experi ence in the industry from the past.

So, from a service line offering or offerings we have right now in Healthcare, do you feel like we are there or some more investments need to be made there or an M&A would be required in this vertical further?

Both M&A and investments, we are not there. As I said we have just started the vertical it's barely two months old, three months old. So , we are hiring some excel lent people. We are looking at M&A. I mean whatever it takes we want to do it because this is a pretty good vertical to be in.

And some industry trends if you were to talk about maybe some micro payer segment, payee segment whatever you see like there?

So, payer segment is pretty saturated as far as I see it. I mean there is not too much scope for new players. I would say the innovation segment, which is med tech and life sciences, etcetera. There we will see much more innovation is happening and innovation happens agile companies like ours who have a complete suite of offerings from experience to engagements we tend to do better. Provider space is very large, but again provider space is pretty focused o n onsite only kind of deals. So, we will have to pick and choose what we will take and what we will not take.

Thank you. The next question is from the line of Devang Bhatt from IDBI Capital. Please go ahead.

So, apart from Healthcare any specific area that you plan to do M&A, or you have identified any particular segments to do M&A?

And in terms of say generative AI . are you seeing some traction or in which segments are you seeing generative AI traction?

We are seeing a lot of traction, but primarily in proof of concepts. Last time in one of the calls I had mentioned that we are doing close to 100 proof-of-concepts overall in the Gen AI space, but a lot of them are either revenues is small or we are doing it pro bono to get into win larger deals using Gen AI space, but we are doing a lot in that area.

And sir in terms of say segment wise maybe in medium term which segments are you seeing green shoots and which segments are you seeing headwinds I mean vertical wise?

Headwind is obvious Hi-Tech and rest of the things I said I have been doing pretty okay. So, that is pretty much the answer and basically we are in just four verticals we don’t want to spread ourselves very thin. So, that is where those headwinds and tailwinds are and as I said even BFSI knock on wood we have seen growth where other competitors and other industry colleagues have seen negative growth.

Thank you. Next question is from the line of Jalaj from Svan Investments. Please go ahead.

So, picking up your brains a little more on Healthcare. Do you guys expect that Healthcare would contribute to somewhere mid-teens or a higher level of the top line in the next two to three years?

Yes, obviously the hope is there that it will contribute disproportionately. I mean without creating a vertical it was contributing 9%, 10%. So, if you're creating a vertical hopefully it will give us that growth.

And one thing which you eluded upon and which your peers have been saying majority of them had a good quarter-on-quarter and YoY in Healthcare. So, some specific issues for us since YoY we had a huge degrowth there on a small base also?

A particular completion of a few projects and also some amount of furlough and companies who are seeing growth they are working primarily in the payer s egment where this is the open enrollment season this quarter. So, they see an uptick in revenue.

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Could you give us some color on the deal wins that we have won in the quarter maybe by vertical where are you seeing t he more strength or even if you could gi ve a trend over the last three quarters where have you seen the biggest trend from a deal win perspective when you look at verticals?

Just qualitatively?

So, qualitatively if you look at obviously my order book is reflecting consistent improvement on a year-on-year basis. Last quarter we reported $194.8 million, this quarter we reported $167.5 million, which is on a YoY basis there's a significant improvement if you see starting from Q1 itself. So, for last three quarters we had a pretty h ealthy order book which represents the deals and as Manish said especially in this quarter our existing new portion of the deal wins has been one of the highest in last maybe 10 quarters. So, I think that is the reflection of the farming which is happening across the verticals except the Hi-Tech where we are seeing some headwinds.

Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Manish Tandon for closing comments. Over to you, Sir.

Thank you all for joining this call which turned out to be a very important day in the history of this country and also holiday. I'm very grateful that you could join even on a holiday. Thank you very much.

Thank you. On behalf of IDBI Capital that concludes this conference. Thank you all for joining us you may now disconnect your lines.