Zensar Technologies Limited analyst Q&A

We will now begin the question-and-answer session. The first question is from the line of Nitin Padmanabhan from Investec.

Congratulations on a very all -rounded quarter. I have a few questions. The first is, if you contrast where we are today from the total order bookings and, let's say, definitive client situations, how would you sort of contrast it versus maybe even 6 months ago? Do you think we’re in a better place and there is more sustainability on growth? So, that was the first one. Also, if you could layer on top of that, how are you looking at Hitech as a segment overall? Do you think that from a declines perspective, that's behind us? Because this quarter obviously benefited from furlough recoveries. Do you think that's sort of behind us? And is there more clarity there? And finally, I think on the depreciation front, some color on the drop there. I think I missed the opening commentary on that.

Thanks, Nitin. Thank you for the kind words. I will take the first question, which was around sustainability and 6 months versus today. Well, as you can see, our order bookings have increased quite a lot. And this incidentally is also a quarter where furloughs, at least in the initial parts, have continued. So, from a Zensar perspective, I am feeling much more confid ent than before that as long as we maintain our execution excellence, we will continue to try and drive both the top and bottom line. Second question was on Hitech. I think you would have seen that Hitech, for the first time in last few quarters, has actually sequentially increased by *0.7%. And as you know, the carryover of furloughs that happened is primarily in Hitech. We are hoping that the worst is behind us, but some of our clients themselves are in quite a bit of bother from a financial perspective themselves. And the overall Hitech industry is not doing too well. So, we are just hoping that the worst is behind us. Y our third question was on depreciation, which I think Sachin can answer.

Thanks, Manish. Nitin, as you know, at the start of the year, we have clearly called out one of the lever of cost optimization for us , looking at our lease premises acros s the globe. So, what we have done, we have resized multiple facilities which we have across India and across U.S. So, given that those lease premises are no more with us, the impact of that can be seen in depreciation. Apart from that, specifically for Q4 , we have a lease termination benefit recorded in depreciation this quarter. But at the same time, we expect that the normalized depreciation going forward could continue to be in the range of $3.2 million to $3.5 million per quarter.

Sure. And just one thing which I missed is from of the deal wins that we have announced, the tenures are still sub 12 months? And do we have a large deal win within this number? It's a very solid number.

So, obviously, the tenure continues to be around the similar range what we have been historically talking about. We don't foresee any significant change, as far as tenure is concerned. And I think deal size continues to be in the comfort zone, where we have been operating.

Sure, perfect. That's very helpful. And Sachin, you will be missed. Thank you for all the guidance right through, and all the very best.

Thanks, Nitin.

The next question is from the line of Sandeep Shah from Equirus Capital. Please go ahead.

Congrats on a good execution, both on revenue and margin. Manish, just wanted to understand, with a robust order book for the full year, is it fair to assume our growth lag, which was there in FY 2024, may start declining or we may approach industry growth rates in FY '25 onwards? And then your vision to start leading the industry growth rate from FY '26, how confident are you in terms of those aspirations? And Sachin, just wanted to understand, in the reported EBIT margin apart from the onetime lease benefit, if you can quantify, is there any other one -offs? And what is our margin guidance, going forward? Because we are, quarter after quarter, doing better than our margin aspiration.

Yeah, Sandeep, thank you. Thanks to you for the kind words. I think the question was around how we are doing. I mean, ultimately, it's a question of probability and confidence level, right? Nobody can say with certainty as to what will happen. But I can say that I am feeling more confident. And as an organization, we are feeling much more confident than what we were, say, a couple of quarters back. And all these are indicators that we track. I mean our customer satisfaction going up, our order book booking going up. For the first time, we ar e seeing sequential growth in all the verticals that we have. So, it does increase confidence, obviously. And the probability, at least in my mind, is higher that we will come very close to what we have set out to achieve.

Can you quantify the lease onetime benefits in this quarter, which has been accounted in the depreciation and amortization?

Yes. So, as I said that in case of depreciation, there was a lease termination benefit, which we got in this partic ular quarter. And that is what has reduced the depreciation. The normalized depreciation, we believe, could be in the range of $3.2 million to $3.5 million going forward.

Just last, Manish, sir. Just wanted to understand, you were earlier all uding that creation of a large deal effort on a consistent basis is a work in progress. So, any status update in terms of creation of a separate team that looks after large deal across verticals, across services?

See, again, somehow people t hink that just creating a large deal team will win us the deals. That doesn't happen. We have a very comprehensive strategy in place. As it so happens, it was discussed in the Board today. And we are going about it in a very methodical fashion, knowing exactly how we want to do it, what we want to do. And we actually have some pipeline on the large deals also.

Okay. Fair enough. Sachin, all the best. And we will miss you.

Thanks, Sandeep.

Thank you very much. The next question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Manish, just wanted to pick your thoughts around the fact that while we've seen some amount of stability on the Hitech side in the current quarter. If you coul d talk about the steps that you are taking in terms of diversifying this business, given the fact that this vertical has a significant concentration on one single customer? And also talk about what you are seeing on the financial services side. While I do understand on the financial services side, our business is largely U.K. and South Africa. But given what we’ve heard from some of your competition, would be great to get your perspective on what you’re seeing with some of your U.S. banking customer base as well as the vertical as a whole.

All right. So, diversifying the Hitech customer base, at this financial year, we have opened about 34 new logos. And I would say that close to 25% of these will be in the TMT sector, and that’s another change that we have done in terms of our thinking, that we are now looking at it not just as Hitech, but like the rest of the industry, we are looking at it as the telecom, media and technology sector. So, that also has brought in a change of perspective and a new energy in the team. So, those are the changes that we are doing. Secondly, as you said that BFSI, our thing is primarily in U.K. and South Africa. Actually, that’s not correct. So, a lot of stuff is happening in the U.S. for us. In fact, US BFSI is growing faster. At least in this quarter, it has grown faster than U.K. and South Africa overall. The large customers in banking, et cetera, remain very subdued, but the mid-market plus insurance, et ce tera, we are seeing a reasonable amount of traction, and we think we will continue to see growth in that vertical.

Just to probe you further on this aspect. So, what we ’ve seen over the course of the recent years, some of the Tier-2 vendors e ventually have positioned themselves as a challenger vendor and winning market share against the large incumbents. If you could help us understand our strength in this space, which would essentially help us or which continue to drive success for us in the U.S. banking portfolio in the recent years. And how should we be thinking about this on a go-forward basis?

No, I think, see, again, the champion challenger and bringing yourself as a challenger is just one of the models. Ultimately, it is a bout how you are differentiating yourself in front of your clients. And one of the things that I can say with confidence that our entire new paradigm of Experience to Engineering to Engagement is seeing a lot of traction in the BFSI sector also. So, I mean, there are various things we are trying, and champion challenger is just one of them. You do not get growth by just putting all your eggs in one basket. So, we are trying a lot of things, and we are getting a lot of success also.

Sure. And just a clarification question on the Hitech side. You spoke about some of the new logos that you opened in the space. When should we be seeing these translate into revenue accretion in the vertical and these becoming material from a client metric standpoint?

Well, we have made a start. At least this quarter, we are seeing a sequential growth in the TMT vertical. I can ’t remember a quarter in the last 4, 5 quarters when we saw that. So, we are already making a dent. And as these newer logo s shape up, we are very hopeful that this sector will grow for us.

And the last one before I get back into the queue. You expressed some confidence about compared to what you saw 2 quarters back. Should we probably be seeing that as a qualita tive indicator of us being hopeful about a positive sequential growth through a better part of FY ‘25?

See, again, I talked about probabilities. I can also give you another example. We are a train going from station A to station B. If we are not picking up speed at the right instance, then we will not be on time, right? We have picked up speed. We are seeing green shoots in what we are doing. So, we feel more comfortable today as compared to what we were 2 quarters back. A lot of things that we are trying are working, which is always a positive sign. At this stage, I would just say that we are feeling more confident than what we were 2 quarters back.

The next question is from the line of Sohil from S.V. Rozani. Please go ahead.

As you know, we don ’t give any forward guidance, unfortunately. So, we will not be able to help you with that. But of course, we have a great Investor Relations team. You can talk to them, and they can see whatever we can provide in a consolidated fashion some publicly available information.

Next question is from the line of Ganesh Shetty, an individual Investor. Please go ahead.

Congratulations, sir, for all round growth. Just want to have one question regarding our newly formed healthcare sector. So, what are the growth strategies for the same sector? And there is also a lot of opportunity in the government sector for this healthcare sector. So, can you please tell us whether we are adding any plan for that? And my second question is around generative AI, which is the products we have recently showcased at different events. And how is the client that is looking at it and how we can commercialize these products? These are my 2 questions.

Right. So, the first question was Healthcare and Life Sciences, as you know, it ’s a sector very close to my heart. This quarter, we have grown *3.2% sequentially. It is one of the first full quarter where we have had a leader in this space. As far as strategies are concerned, again, we don’t want to be everything to everyone. We have defined clearly the sub -industries where we want to play. We have cle arly identified parts of the value chain where we have to play. And we are looking at acquisition targets also based on that. So, we are making some very good progress in terms of having a strategy and trying to execute against it. Your second question was on Generative AI, okay. Generative AI, I think I have said this before. It's a technology that is still in a very nascent stage. People are still experimenting. And the problem with the technology is that just because you have a proof of concept doesn't m ean that it will scale, right? And you make money only if your proof of concept can scale. So, there are lots of actions happening on Generative AI on proof of concepts. We internally are using Generative AI in innovative fashion to see how we can accelera te and improve our productivity. But there are still questions around the legal use of this, especially as it pertains to service providers like us in terms of IT and so on. So, like our clients, we are also being very cautious in not putting all our eggs in one basket.

The next question is from the line of Akshada Deo from Vivog Commercial Ltd. Please go ahead.

Sir, my question is regarding the other income. I understand that you expect lease liability or explain lease liabilities that got reduced for depreciation, but the other income is what I wanted to know a bit more detail on.

So, as you know, as a company, our cash and cash equivalent balance has been going up. And the current environment, as far as yield is concer ned, also has been positive. So, the other income, we had almost close to 8 .0% yield on our investable surplus that is what is getting reflected over there. Additionally, we have also resized and terminated a few of our leased facilities in U.S. and India. That has also resulted in some portion of it in other income. Further, we have completed adjustment to a consideration for one of our acquisitions, which was settled during this quarter. So, there has been some other income booked through that as well.

The next question is from the line of Ngn Puranik from ENAM. Please go ahead.

Manish, thanks for the wonderful consistently always mai ntain, fantastic results. I have a question on how do you construct a large deal in the current context? And especially in earlier times, we used to have large enterprise software packages right from an ERP to CRM to HR, various modules. And there used to be a lot more need to the deal. So, today, what are the elements that go into it? So, your digital cloud is still around, so what exactly goes into that? Digital experience, you have mastered it. And analytics, you're getting in AI. But they're all not big ones.

Thank you, Mr. Puranik, for the kind words. And as usual, your questions are very incisive, show a very deep understanding of the industry. So, large deals, while in the past, there were 2 aspects to large deal. As you rightly said, one was in terms of the packages like SAP, Oracle, CRM, et cetera. And the other was in terms of application management. Today, mos t of the large deals are actually occurring in the application plus infrastructure management services. But reason for the large deal also is that now these things are being bundled with hardware and software also. So, think of it as if you have an on-premise data center and I would go to a client and say, "hey, I can not only run this data center for you, but I can give you data center as a service." Right? If you remember the good old sale and leaseback mechanism, right? So, a lot of those kind of deals, there are a lot of consolidation kind of deals, mainly on the application management and infrastructure management is what is happening.

So, that means more on the balance sheet when you have this?

Frankly, yes, for some of the really large deals, you should have the balance sheet to be able to do it.

And what service lines will go into this?

Primarily Cloud and Infrastructure Services.

Cloud and Infrastructure Services.

Primarily and there are like maintenance of ERP, and all also can be included in that. But primarily, I would say at least 75 percent of the deals would be in that area.

Manish, I want to understand what is your pipeline services for the next few years? Because this will do well. How do you get core into your service offering? For example, can an Analytics become a bigger one? And AI, in productivity engine and also as a predictive engine, can they be significant over a long period of time? In the short term, it may not be. So, what will be the next layer of services which will form the next large deal?

I think on the pipeline, see, Mr. Puranik, our business is very simple. We have to know where our clients are going and start do ing it, just be 1 or 2 steps ahead of them. If you have 5 or 10 steps ahead of them, then that is in trouble.

You are in trouble.

And it's fruitless to try and anticipate what it is going to be. Can you imagine us talking about generative AI 2 years back or even 1 year back? So, the characteristic that a successful organization has to build in this area is to be agile and nimble and continue to evolve quickly with the market.

And the key leaders for these large deals within the company would be, what profile would be?

Sorry, I didn't get that part.

The key leaders, key guys who run these large deals, who architect these large deals, they come from which kind of a profile? Is it a market -facing background or program management background? Or what kind of background.

Ultimately, most deals, you have to build that trusted relationship with the client and the buyer, whether you build this trusted relationship through execution or you build it through relationships or you build it through a combination of both. Usually, it is a combination of both.

But how do you handle large deals in Hitech sector? How do you create large deals?

I mean the more the secto r is under stress, I would say, easier it is to pitch a large deal there, because they are looking at cost savings. And every remedy driver of large deals is cost savings.

Yes, you have a way to simplify everything, wonderful.

Thank you.

The next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities. Please go ahead.

Yes. Manish, I have a few questions. I joined the call a bit late. Sorry for again asking the same questions if already asked. In comparison to FY '24, what do you think about FY '25 and FY '26 in terms of the client behavior and vertical -wise the growth pickup and all? Because on the margin front, you have done an excellent job. And on growth front now, what's the way ahead? Because since pass-on year as we are looking for the growth in this business. Yes, I understand the macro challenges are there, but still.

I mean you can anticipate this by looking at the Q4 numbers of us versus our competitors. I don't have to really outline how I feel about Zensar for the next year. And as you rightly said, the macroeconomic conditions remain the same. And before you joined, I answered this question that I feel much more confident as an organization as to what we have set out to achieve.

The next question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Manish, over the course of last 12 to 15 months since you joined, we have still seen some amount of leadership flux in the organization, including some hiring in the N minus 2 and N minus 3 levels. If you could help us understand where are we in that journ ey in terms of stabilization of the leadership team? And also, while you continue to exude confidence about growth going forward, if you could also make some comments around how should we be thinking about growth through the course of FY '25 in terms of quarterly performance?

So, leadership change, look, I am not one of those CEOs who will come in and treat the existing employees like that old Bajaj bulb ad “Ghar Bhar Ke Badal Dunga” types. So, I'm not one of those. As I mentioned to you before, we give everyone a chance and opportunity. We make sure that, A), they perform; B) they like to be where they are, right? And based on that, we or the people make a decision, one way or the other, and we continue to progress. We continue to have a good leadership pipeline, both internally and externally. So, we just want to make sure that there is close alignment in terms of performance and expectations and in terms of culture for both the organization and the person involved. As I said, I mean, there is no hard and fast rule that we will change so many people or whatever. I have been very satisfied with my team. And hence, I don't think that you should expect any wholesale changes. I'm not one of those IT services CEOs who will come and say that I'll bring my entire new team. You have seen that over the last 4 quarters, we have worked together as a team as what we inherited.

And any thoughts on how should we be thinking about sequential growth through the course of quarter of FY '25, given the increased confidence should one probably do see us grow every single quarter?

See, I told you last time that our aspiration is to grow every single quarter. And actually, if you look at it over the last 5 quarters that I have been there, except for 1 quarter, which is Q3 of last year, we have shown sequential growth despite the tough environment. We have shown sequential growth every quarter. And it continues to be our aspiration, it continu es to be our drive to make sure that we continue to have revenue growth every quarter.

Thank you very much. As there are no further questions, I would now like to hand the conference over to Mr. Manish Tandon for closing comments. Please go ahead.

All right. Thank you. I would say, first of all, thank you for joining this call. I know there were a lot of earnings call going on simultaneously, so I'm very grateful to all of you who have joined this call. From my perspective, this is the first full year that I completed as the CEO of this company. I feel very good about where we are and what we have achieved over the last 1 year. I would like to thank my entire team for that, Sachin, Vijay and so many people who have contributed to this. And I would also like to thank the investors for reposing their faith in us. Thank you.

On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. * Growth mentioned in Constant Currency