Zensar Technologies Limited (504067) Earnings Call Transcript & Summary

Good morning, everyone. Ladies and gentlemen, good day, and welcome to Zensar Technologies Q2 FY '21 Earnings Conference Call hosted by IIFL Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rishi Jhunjhunwala, Lead Analyst IT services and Internet sector from IIFL Institutional Equities. Thank you, and over to you, sir.

Thank you, Janice. Good morning, everyone. It's my pleasure to host the senior management of Zensar Technologies for this second quarter fiscal '21 earnings con call. Today, we have with us Mr. Sandeep Kishore, MD and CEO of Zensar; Mr. Navneet Khandelwal, the CFO; and other senior management team members. With that, I would like to hand over the call to Mr. Sandeep Kishore to give us an introduction of the rest of the management team and a brief update on the second quarter results. Over to you, Sandeep.

Thank you, Rishi. Hello, and good morning, everyone. First and foremost, I hope and pray, you and your families are doing well, keeping healthy and safe in these challenging times. Thank you for joining us today to discuss Zensar's financial results for the second quarter of fiscal '21 ended on September 30, 2020. On the call, I have with me from Zensar management team, Navneet Khandelwal, CFO; Vivek Ranjan, CHRO; Prameela Kalive, COO; Harjott Atrii, Global Head, Digital Foundation Services; Nachiketa Mitra, Global Head, VFSI; [indiscernible], Global Financial Controller; and Rishabh Mishra, Head of Corporate Development. All of at Zensar continue to send our deepest gratitude to everyone on the front lines of the pandemic all around the world. Our thoughts and prayers are with everyone who have been impacted by COVID-19. I also personally want to thank all our employees who continue to work so hard for our clients and their businesses. As COVID continues to present great risk and uncertainty to individuals, communities and businesses, empathy, agility and resilience have become hallmark of our response to the same. Before I take you through our Q2 performance, I'd like to announce that we recently divested our global third-party maintenance business to Service Express LLC as part of our long-term strategy to focus on our core business, which comprises of digital, cloud and IT services. Service Express is a U.S.-based leading provider of TPM services and is suitably placed to grow the TPM business. Last year, we had divested our rest of the world business. And with the TPM business being divested, we are at an even better position to execute on our strategic priorities and meet changing demand of the marketplace and our customers. As disclosed in our filing with the stock exchange, the estimated loss from this transaction will be in the range of $11 million to $13 million. The business contributes approximately $6 million a quarter to Zensar's revenue. However, it is diluted to our EBITDA and PAT margin. The transaction will, therefore, improve our margin profile and also our liquidity. It's been 2 full quarters since COVID was declared a pandemic, and we rapidly moved to 100% work-from-home model, which enabled us in ensuring safety of our associates as we mobilize to monitor and provide 24/7 support and assistance through our digital native platform. As a part of our response, we had instituted the COVID Nerve Center, which focused on 6 broad themes: Associate wellness, business continuity, client management, cybersecurity and data privacy, business opportunity and cash, liquidity and cost management. With systematic structure and rigorous cadence in place, we have become better equipped in dealing with the new normal. At the same time, we continue our effort in improving operational efficiency in launching client-first initiatives to drive effective client [ mining ]. In a highly uncertain environment, while economic activity was restricted by global lockdown, we executed well and delivered strong operational performance in the second quarter. We posted solid margins and robust cash flow, while strengthening our balance sheet, innovating for our customers and investing in the future. Zensar posted a 0.6% increase in its revenue, which stood at USD 131.6 million. This puts us back on the positive growth trajectory and we believe we are strongly positioned to continue this growth trajectory. Our digital revenue continues to grow as a percentage of total revenue and now stands at 61% of our total business. It witnessed a sequential increase of 3.2%. Quarter 2 fiscal '21 was marked with unprecedented improvement in our margin profile. Our gross margin in quarter 2 was 34.1% of revenue compared to 28.8% in quarter 1, a 19.2% increase quarter-on-quarter and a 1.2% on a year-on-year basis. We surpassed the 15% EBITDA target delivering an 18.8% EBITDA margin in quarter 2. This is a staggering 440 basis point increase on a sequential basis. Our teams continue to focus on cost conservation leveraging the key levers across the spectrum, optimizing direct as well as operational costs. Our core EBITDA stood at 19.3%, which is a 440 basis point increase on a sequential basis. We posted our highest PAT margin in the past 8 quarters at 9.1%, amounting to $12 million, marking a growth of 24% sequentially and 5.7% on a year-on-year basis. This does not take into account the negative impact of exceptional items on account of the TPM business divestment, amounting to USD [ 11.9 million ]. PAT margin for the core business stood at 9.3% of revenue. While Navneet will talk more about our cash status, our collections have just been phenomenal. Thanks to our team and our clients. We continue to focus on improving our collections, which have improved significantly in the past few quarters. Our DSO stood at 76 days at the end of quarter 2, which is an improvement of 26 days on a yearly basis. Our pipeline continues to be very strong and healthy at $1.5 billion with several large deals in the mix. We continue to see traction in the demand side environment with an increased demand for our digitization and cloud services across our [ clientele ]. Our order booking in quarter 2 was a solid $175 million with some impressive wins, both in net new as well as new wins in existing clients. Europe and South Africa regions grew significantly on a sequential basis at 8.1% and 6.0%, respectively, in U.S. dollar terms. We saw continued traction in our existing as well as few new accounts, which provides us hope of a stabilized and renewed demand side environment. A favorable exchange rate environment helped the growth in quarter 2. Our retail vertical had bottomed out in quarter 1. And this quarter, in quarter 2, we saw an uptick recovery by 12.8% sequentially. This quarter, we saw the early sign of stabilization as our clients are slowly bouncing back. The situation that COVID had created has made it certain that digital and cloud is where the growth is. COVID is accelerating, as we all know, the digital economy, and we expect to see the impact on our cloud business, which has very healthy deal in the pipeline. To commemorate launch of our digital foundation services, which is aimed at helping our customers in their journey towards digitalization and adoption of Enterprise 4.0, we organized virtual launch event on August 18, which was attended by 64 external attendees, 52 industry analysts and adviser and 10 investment firms. The feedback on the event showcasing our capabilities and strategy received outstanding feedback. Our digital foundation services grew by 11.4% on a yearly basis, while next-gen infrastructure services grew at 33% and on a yearly basis, all in U.S. dollar terms. Client centricity continues to remain the cornerstone of each and every initiative Zensar undertakes and forms the very core of our strategy in go-to-market. We have left no stone unturned to be relevant and value-accretive in every conversation that we have. Our revenue from one of our top 5 during the quarter declined. This was primarily because of slowdown in customers' own business. Other than that, we saw an overall quarterly growth of 2.8% in revenue from the rest of the top 20 customers. Our number of $5-plus million clients continues to be at [ 24 ]. Our global headcount at the end of quarter 2 fiscal '21 was 8,614. Our voluntary attrition declined sequentially and stands at 11.7%. It was 13.5% in quarter 1. We also welcomed our new batch of associates from top B schools in India and strengthened our teams by hiring at various leadership positions to expand our businesses strategically. Last quarter, we had pioneered and onboarded 112 associates under work-from anywhere model, and I'm glad to inform you that all of them have been integrated with client projects across the spectrum. In these difficult times, we have made a mark by being extremely empathetic to our clients' needs and have focused all our efforts to provide them tailor-made solutions for their evolved requirements, focused on cost conservation and, of course, rapid digitization and cloud movement. This is why we feel confident in our ability to come out of these challenging times and continue to deliver value to our clients and communities. With that, I will now invite Navneet, our CFO, to provide update on key finance data, after which, we will open the floor for questions. Navneet, over to you.

Thank you, Sandeep. Good day, everyone. I welcome you all to our Q2 FY '21 earnings call. I hope you and your families are keeping safe. In addition to Sandeep talking about the business, I will take you through some of the details on financials. In the second quarter of FY '21, we have reported revenue at INR 9,794 million, which reflects a sequential decline by 1.2% and year-on-year decline by 8.7% in rupee terms. In U.S. dollar terms, the reported revenue stood at $131.6 million for second quarter, reflecting a 0.6% sequential growth and an annual decline of 13.6%. In constant currency terms, the revenue declined by 0.6% sequentially and 12.8% annually. The U.S. dollar realization during the quarter has been INR 74.4 per dollar against INR 75.8 in the previous quarter. The year before in the same quarter, it was INR 70.4 million. Our gross margin for this quarter was 34.1% as against 28.8 percentage of previous quarter. Expansion in GM by 5.3% sequentially was largely driven by operational efficiencies, resulting in direct cost optimization, improved utilization and favorable exchange rate impact. Our offshore revenue mix has improved sequentially by 3.1% and 4.7% on a year-on-year basis. The effective tax rate for the quarter is at 26.5% as against 26.2% in the previous quarter. For the quarter ended September 30, 2020, billed DSO increased to 55 days as against 49 days in the previous quarter, while DSO, including unbilled, increased by 1 day to 76 days as against 75 days in the previous quarter. Compared with the same quarter year before, it has reduced by 26 days. For the half year ended Q2 FY '21, operating cash flow grew by 154.8% to [ INR 4,810 million ] against [ INR 1,888 million ] for the corresponding half year of FY '20. This demonstrates our continued focus on collections and better working capital management. Our operating cash flow as a percentage of EBITDA stood at [ 147% ] as against [ 63.8% ] in the half year ended Q2 FY '20. And free cash flow as a percentage of EBITDA was 137.8% as against 48.2% in the half year ended Q2 FY '20. Cash and cash equivalents including investments in mutual funds, net of the borrowings, increased by $16.2 million from $101.1 million in the previous quarter to $117.2 million in the quarter ended September 30, 2020, which is an increase of $103.9 million on a year-on-year basis. The total amount of outstanding hedges as of September 30, 2020, was equivalent to $172 million against $152.6 million in Q1 FY '21. As of September 30, 2020, we have classified our TPM business as assets held for sale. Consequently, a onetime charge amounting to USD 11.9 million, being the excess of carrying amount, including goodwill, over the recoverable amount has been recognized in the P&L as an exceptional item. We expect the disposal of this business to be concluded upon fulfillment of the closing conditions during the quarter ended December 31, 2020. With that, I come to the end of my presentation and open the house for questions and answers.

[Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal Financial Services.

And congratulations on the really good margin performance. Sandeep, I wanted to start with that element on the -- this quarter, you have taken a massive improvement in operating margins. If you can help us understand how sustainable that is because if you look at the drivers of that, it seems like there is a big contribution from offshore shift as well as the lower employee count. Both of which might prove a hindrance in growth unless you will kind of move in the other direction. So if you can just help us understand exactly how we should look at it over a longer period of time.

Yes. Thank you, Mukul. I mean I'll get Navneet to give more color. But you're right, we are very pleased with the overall margin performance, a significant shift of, as I called out, 440 basis points over the last quarter and roughly about 480 basis points year-on-year. There are many, many levers of that. Offshore is one. As you know, from the beginning of the pandemic, a lot of work has increased, particularly on the digital side and the cloud side. And the only way you can get it done at capacity is leveraging offshore. It's much easier done during the pandemic because anyway, it works from home even as an on site. So I do believe there are levers available for us to maintain and put it in the range. But let me call Navneet to give you next 2, 3 levels of details on why we feel positive about the margin. So Navneet, do you want to add some color on this?

Yes, sure, Sandeep. So Mukul, our margin expansion is largely based on the direct cost optimization, which is evident in the gross margins completely. And that's through the continued focus on operational efficiencies, tight cost control measures and driving key operating parameters in aligning our costs with our revenues. You will see that we have been able to optimize headcount, which has gone down by 413 people quarter-on-quarter. 267 out of which is at onsite. A good chunk of this reduction at onsite has happened in our subcontractors. Actually our subcontracting costs as a percentage of revenue has declined from [ 15.6% ] in Q1 to [ 14.2% ] in Q2. So our offshore mix has also increased quarter-on-quarter by about [ 3.1% ], which has added a positive impact on margins. And we continue to put our efforts in automation and digitization to enhance productivity, which has helped in driving our operational efficiencies. We also have benefited from reduction in travel and other discretionary costs, which have come down in these times. We believe that even after all travel resumes, the cost will not go back to the pre-COVID levels and same will continue. So in summary, while there have been certain entailments which have [indiscernible] into our margins, we do have sufficient levers to mitigate their impact thereon. And given that we have got a very chunk of our revenues which are also from fixed-cost [indiscernible] helps us to [indiscernible] for particular actions. We will not [indiscernible] standard margins within the narrow band in the coming quarters is how I would summarize it.

So, if I look at your U.S. margin guidance of 15%, that has clearly been reduced by a wide margin. Is there a new [indiscernible] you are targeting now for medium term or you honestly believe that the margin will probably go back to your previous guidance [ time ]?

So, Mukul, our [indiscernible] too are trying show consistency in their margin levels for a few quarters. Right now we are not setting up our revised targets per se the way we use to articulate them. So will monitor this and we stay committed to ensure that we will stabilize the margins at this level. So going ahead, after a couple of quarters, probably, we should be able to indicate what could be a long-term margin range you should target at?

Understood. And Sandeep, if I may ask one more question on the growth element. If you look at the growth performance over the last 3 to 4 years, it has clearly lagged your peers despite continued robustness [indiscernible] and deal pipeline. So this was more on the longer term. If you can do a bit of crystal ball gazing over the next 2 to 3 years, where do you exactly see yourself? Because we have been hearing for a while now in terms of the growth improvement, but that clearly has proven a bit challenging?

No, I think, Mukul, we are very committed to get back to the growth as we exit this particular fiscal year. There is a complete rehash of our financial services strategy. That's why we have Nachiketa on board to completely redo. Also our DFS business, which is our cloud business. We have excellent pipeline. And hopefully, we will win and convert. I think this particular quarter, I also want to -- when I called it out in my commentary as well. If we exclude the impact from one of our top 5 customers, the growth actually has been pretty good. It's 2.8% on a sequential basis. That particular customer, one of the largest customers for our -- the [ Hi-Tech ] customer. Their business has been challenging. And we had talked about it even in the last call. That the business from that client will be soft for near to medium term. We are trying to see how best to mitigate it. And outside of that customer, we actually grew quite well even in quarter 2. So we are very committed to get on the growth curve, led by our cloud business, financial services and, of course, the entire investment that we have put into digital. That's why you'll continue to see expansion in our digital services business as well.

The next question is from the line of Ameya from IIFL Institutional Equities.

Thank you for the opportunity. So could you give us some color on the near-term demand trends that you're seeing within each of your verticals? And in particular, what is driving the strong sequential growth in banking and insurance, that would be helpful.

Yes, sure, Ameya. So look, our pipeline continues to be very strong. It's about $1.5 billion. I think the shift last time when I talked was also in the same range. We had [ won ] about $150 million. This time, we won about $175 million. However, shift actually is a lot of those deals have moved to much more in the advanced stage now than they were the last time I talked to all of you. So I feel very good about the conversion from the pipeline, both in our cloud business as well as in our financial services business. The underlying philosophy is there are some reasonably advanced stage deals in the cloud, and I'll call on Harjott to give you more color. On cloud and after that, even [ Nachike ] can add on what we are seeing in the financial services, to answer the second question that you asked. Harjott, first you?

Sure, Sandeep. So we have a significant number of things in the pipeline, which are in the back of stage set for Q3, Q4. A lot of demand in these deals are coming [indiscernible], next-gen high-margin profile deals. And we are kind of being very well as a DFS business here. So a lot of our businesses is primarily around experience centric with regard to employee experience, customer experience, as well as cloud transformation services and multi-client cloud [indiscernible] cloud management. So that's where we are seeing a lot of demand coming for DFS business. And that's across our stated verticals, which is DFS, High-Tech and retail as well as [indiscernible].

Sure. [ Nati ], do you want to give us a lot on the growth in the FS sector, insurance and BFS.

Sure. Thanks, Sandeep and thanks for the opportunity. First, I -- this is my first analyst call. I am very excited to be part of Zensar. I'm still settling down. It has been just a little over 3 months. But during this time, I have been meeting a lot of the clients, the team, the solutions that we have for the market. And I feel very excited about the state of what we have and the opportunities that I see in the market. As far as the growth that has happened, it has primarily been driven by existing clients. We've added 2 new clients in the insurance segment. But most of the growth has happened from existing clients doing more work. And we are, of course, focused on expanding the map going into newer customers in the banking space, and we'll continue to report as we progress.

That was quite helpful. And if I may just chip in with one more. The COVID pandemic seems to have only actuated the need for businesses to accelerate their transformation initiatives [indiscernible]. So based on what you are seeing, are you seeing some sort of expansion in the clients' technology budgets to accommodate these initiatives?

So let me take that, Ameya. Overall, the short answer is yes, but it's all towards more on cloud and digital and expedience and data, less on the legacy stuff. Overall, as you've seen even Gartner and ISG talk about significant activity in the deal size and expansion in the IT spend in the calendar 2021. So the trending is there. Absolutely, yes. It's more towards the offering that we talked about, both on the cloud as well as on the digitalization side. It's less on older and legacy systems.

The next question is from the line of Madhu Bapu from Centrum Broking.

Yes. Sir, on the top account softness, so how should we see 3Q? Because I think that's -- we are in a furlough quarter. So [indiscernible] how this top account is going to [ span ]? And second, on your incremental, I think the net cash has now surged to a new high. So any -- if you're looking at further bolt-on acquisitions, which are the areas where you want to look at?

Sure, Madhu Babu. So look, we've mentioned it for our top customers as well. Their business is soft, as is widely known, and we have been able to maintain our wallet share in that account, and we are holding quite well. Their overall spend has come down, and that's the reason you've seen softness on that. In spite of that softness, I think in quarter 2, we did well. You should expect softness to continue for at least 1 to 2 more quarters. This anyway is a furlough quarter. So -- but I'm just talking from a broad perspective. We are working very closely with this customer to make sure that we are aligned strategically to them in their core business process, in tech ops, in data as a service category as the customer tries to transition. So we are working very closely, but their business is soft, and you should expect softness in quarter 3, quarter 4. But as we go into the next fiscal, I think we have seen many cycles with this customer before. So we should be able to manage it. Second part of your question is cash, yes, we are very pleased with the net cash, which has gone up, as Navneet has explained by over $100 million, and we are an acquisitive company. There are 2 areas of acquisitions that we are looking at. One is to bolster our cloud business, the digital foundation services, as we call it, particularly into the Azure and the GCP stack. And the second is in the digital software engineering area. And we are very actively looking to do bolt-on acquisition in both of these.

Secondly, on the work from home experience, I think we are the only company to get that -- we are hiring [ pressures ]directly on the work from home. So how has been the experience? And how post-COVID, how do you see the delivery model evolving.

Sure. I'll get -- Vivek to answer the experience part first and then Prameela can add the delivery model evolution. So Vivek, first you, please?

Yes. Thanks a lot, Sandeep. Thanks a lot. That's a great question. Yes, we have been pioneering in terms of enabling work from home permanently for [ freshers ]. And I'm pleased to let all of you know that the experience has been fantastic. In fact, it's well received by everybody, and all our associates are very engaged and are also assigned to projects. So to answer your question, it has been a fantastic experience, and everybody has given very positive feedback. Over to you, Prameela.

Prameela, do you want to add to that?

Yes. I'll just add to what Vivek has mentioned. We are also seeing the delivery models evolve very differently post the pandemic while we all move to the 100% remote working model. We believe when the pandemic opens up, it will be the model will mature more towards something between 100% remote versus centered around our centers. It will be largely much more than what we've seen in the past. We are already moving towards distributed agile teams working partially from home partially from different locations globally. As we see, we will see this model settling in, and we're seeing a lot of innovation on the digitization phase as well, which is going to allow us to continue to drive this large remote model. And we're seeing this innovation of Zensar is also gearing up a lot to continue to be in the distributed delivery mode.

[Operator Instructions] The next question is from the line of Rishi Jhunjhunwala from IIFL Institutional Equities.

So Sandeep, one question around your deal win, right? So first of all, clarification if these deals include renewals, but more importantly, you've talked about $1.5 billion of pipeline. And if I just annualize the deal wins that you are recalling right now, it's almost 50% kind of conversion. So where do you think that conversion rates could move up to and the pipeline could move up to over the next 12 to 18 months? And what steps you are taking to do that?

Thank you, Rishi. So first is, yes, it does include renewal. That -- we've been very consistent about our deal wins for several quarters now. The way we report it is renewals because there are some very large customers and renewal is largely a competitive process. So it's not just we take renewal on just the face value. So yes, it does include renewal. Also, we track roughly on an average of 45% to 55% renewal and new win. It's been trending recently in the same narrow band for several quarters. So half of it you can assume are new wins, which are incremental and the other is renewal of the existing business. Our big to win is actually quite good. Our endeavor is to expand that $1.5 billion size itself. You would recall for -- and we've been publicly talking about it as well for several quarters now. It used to be about under $1 billion, then it trended up to $1 billion. Last 2 quarters, it's $1.5 billion. We stabilized it. As we expand more into our financial services as -- as [ Nati ] settles in, he's now hired an amazing team. I do feel very confident that with both financial services and our cloud business, you should start to see an upward trend in the pie of the overall pipeline. And if we maintain our win rate, our win rate should look up as we go into the next 12 months or so.

Okay. Great. The other question goes back to the relation between -- or the balance between investments and margins. So 2-part question to it. One, on the headcount side, we have seen significant reduction over the next -- over the past 12 months. Utilization also are coming already at 83%, 84% levels. So with the deal pipeline in mind with the kind of recovery that you're seeing, do you think that we need to go a bit more aggressive on the hiring side? And in which case, how do you intend to manage the gross margins and any potential [indiscernible] that are upcoming in the next 2, 3 quarters?

So that's a lot of questions, but let me try and answer, and if I miss, then you please remind me. So I think the last question first, yes, we are going to do wage increase from 1st of January, for all the employees around the world. The business has stabilized. We have done very well, as you know, on the margin and the cash side. So we are going to be doing the wage increase January 1 onwards. The second part of the question, on the levers, you're right. I think the utilization is in the [ bank ]. We -- at peak, it was 84%. We are in 83-plus range. There's a little bit of chance to do better there. I think to me, there are 2 big levers, which I still feel very good about. Offshore, in the pandemic time period, actually has increased. It used to be a year about 35% of our revenue. It's gone up to 38% plus. And I still think there is room to do more there. So that's one lever. And the second lever, Prameela talked about it is the automation. The third lever is our win on the DFS business, which is the cloud business, is largely fixed bid managed services win. And our ability to drive better margin, as I've always maintained, is much higher when you are running programs end-to-end, close to 90-plus percent of the DFS business comes in the managed services range. Unlike the half and half in our digital and application business. Enterprise digital, there is still a lot of capacity and time and material, whereas the cloud business is largely on the fixed scope and managed services and outcome led. So we still have margin levers available. And that's why when Navneet was giving commentary, why we are not revising our guidance of EBITDA. But based on what I have seen the performance and based on where we see ahead, I mean, we have enough levers available to be in the narrow band.

And lastly, on sales and marketing, if you really look at it, you are probably among the lower quartile in terms of spending on sales and marketing as a percentage of revenue compared to the sector. So with the kind of traction you're seeing and you're still able to manage this kind of an expense, do we think incremental investments going there? Are you optimally invested on those channels?

Rishi, we will invest more. It's pretty much -- you're right, I think there is room for us to invest more and we will invest more in sales and marketing. As Nati has settled in, we've already hired there even in our DFS business, in our consumer tech, now that the consumer services business has stabilized. So yes, we will invest more.

[Operator Instructions] The next question is from the line of Nitin Padmanabhan from Investec Capital.

Good morning, everyone, and congrats on the solid margin. First is, I just wanted your thoughts on -- with the deal wins coming through and we're sort of being between closer to 50% net new, by when do you think we'll be sort of pre-COVID in terms of revenue and start showing a year-on-year kind of growth? Do you think that still sometime towards the end of next year? Or it's likely to happen earlier.

So Nitin, thank you, first of all. And we are all very committed at this time to win. We have very, very good pipeline. So our immediate focus is to get those conversions done. If you recall, our exit into the last fiscal was about [ 140 ] or so. We are some ways away compared to where we -- that, of course, included the TPM business. And so we have some way -- but I feel very good that we should be able to get there sooner than later for sure.

Sure. And I think if you look at the prior year, we had headwinds within the retail or consumer verticals. And now I think for the next 2 quarters, we'll probably have headwinds from the top line. Just wanted your thoughts on -- from a portfolio perspective, do you think the underlying churn that we have been seeing for so long is largely towards the end of it or -- and we should start seeing incremental growth. And number two is I noticed that there were a couple of Hi-Tech based deals in the presentation. Does that sort of -- is that likely to sort of counter the decline in the top clients entirely?

So Nitin, I think the top client, if we keep that aside in the rest of the business, which is our consumer Services business, insurance business, financial services business, our cloud business, we feel very good that you will see growth. The top client is soft, and I mentioned earlier, will remain soft for at least in the medium term, 2 quarters or so. We also have furlough in this quarter, which normally the top client anyway exercises. So our focus is, a, maintain wallet share in the top client, very clear. Number two is grow as fast as we can outside of the top client so that we try and mitigate the risk the best that we can. The pipeline is very good. Our win rates are very good. Our entire focus from the management team is to complete the wins and push the growth curve back to where we need it to be.

Sure. And just one last one, if I may. On margins, are we suggesting that despite compensation increases in Q4 will still be in a narrow band? Is that what we're saying?

Yes. The short answer is yes, we have enough levers. We don't give any forward guidance. But based on everything, what you heard from us, we feel reasonably confident that it should be in the narrow band.

The next question is from the line of Shekar, individual investor.

Can you throw some light on this other exceptional item loss we had?

Sure. Navneet, do you want to take that, please?

Yes, sure. So as we have announced, we have identified the TPM business as an asset held for sale. And we've signed a definitive agreement in around 20th of October for its sale. The eventual sale will happen or the closing will happen towards December. But as an asset identified for held for sale, we have to restate it in our books as of September 30 on the net realizable value. And basis, the excess of the carrying value over the net realizable value, net of all the selling expenses and various adjustments, which are required to be done. We have reported a onetime exceptional loss in the current quarter of about $11.9 million. And so that's what's the exceptional item.

All right. So is it part of the strategy to divest the noncore assets, this selling of asset?

Yes. This is a strategy we had called out. And as Sandeep mentioned initially in his presentation as well that we had identified rest-of-world business and the third-party maintenance business. The rest of world business was [indiscernible] more than a year back. And the third-party maintenance business is what we have divested right now. With this, we have concluded the divestiture of all of the noncore business. And go forward, what you will see from Zensar financials, typically after the closure happens of this deal, will be only the core business.

Okay. Got it. So there are no more assets to be sold or no more noncore stuff to -- left to be sold out. So it's all complete now. Is that right?

You're right. Yes, you are right.

And so I just wanted to know in the -- like in the past 5 years, we have done some acquisitions like Indigo, Blue Slate, like how has those turned out to be in terms of like how much have we invested? And how much has been return on capital for those acquisitions which we have done in organic accretions?

Sure. Sandeep, do you want to talk about?

Yes. So let me give the broad color, Shikar. I think the last acquisition was Indigo slate in August of 2018. It's been more than 2 years, completely integrated, very successful. Also, it brings to the first acquisition that we did was in 2016, which was Foolproof. All the acquisitions have done very well. Retail acquisition, which, of course, got severely impacted because of the reclassification of the retail business itself. But otherwise, I think Cynosure, which is very core part, you've seen the growth in insurance. We've also seen the growth in coming from digital businesses. So we're very pleased with the performance that we have got from all the acquisitions. We are ready for new acquisitions, as I mentioned earlier. We have cash. We are looking actively to acquire new competencies in digital engineering and cloud.

Right. So I hope in more to get some contract of detail. Is it possible if -- as the amount we have done for the acquisitions? And like what has been the return on capital? Like what's the typical figure we have in mind while going for an acquisition?

Navneet, do you want to cover that?

Yes. Yes. So all our acquisitions are based on a long-term plan. With respect to looking at what are the benefits we get directly and all the synergistic benefits that we can derive. And based on that, we do an evaluation and go ahead with a particular acquisition. And in the long term, our objective is to see how these acquisitions can help us improve the ROC for a period of time. So we -- I would not be able to share a particular number or this thing because it's very difficult to track and show that separately, in view of the fact that all of these have integrated pretty well. But as Sandeep called out, we are seeing very good traction coming out from this acquisitions, which have been integrated and should continue to reflect in the performance of the company.

[Operator Instructions] The next question is from the line of Mukul Garg from Motilal Oswal Financial Services.

Sandeep, this was basically on the Q3 color, while we understand that you don't provide forward guidance. But if you look at last 4 quarters, you have had a negative top line growth. And Q3 seasonally is a quarter as you highlighted yourself, because of furloughs, there is an impact. So given this, the low base of last 4 quarters, do you think the business will grow next quarter or because of the top line effect and furloughs, you will again probably have a bit of a weakness here in Q3.

Mukul, the furlough picture will actually become clearer in middle of the quarter. We haven't seen anything unusual on furlough as of now. But the pandemic is still there. And you've seen various reports coming from Europe, particularly, U.K., France, Germany, U.S. hasn't seen so much, but I wouldn't be surprised if it takes a different turn. So furlough, we should actually just keep it aside because the underlying business fundamental is what we focus on. Furlough will be there this quarter. And we have a situation, as I called out, for one of the top 5 accounts there. So our objective is that we want to grow, clearly. We know that there has been softness in the business. And our entire focus is through the growth levers that we have, which is the financial services, the cloud business, we really want to win businesses and grow. So it's difficult to call out, but our intention is, as we go into the second half of the year, you will see growth coming back into the Zensar business. Absolutely, yes.

[Operator Instructions] Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Rishi Jhunjhunwala for his closing comments. Over to you, sir.

Thank you. On behalf of IIFL Institutional Equities, I would like to thank Mr. Sandeep Kishore and the entire management team of Zensar Technologies for giving us the opportunity to host the call. With that, I'll just pass it on to Sandeep in case he has any closing remarks for the investors and analysts.

Thank you, Rishi. Pleasure to talk to all of you, and please continue to be well, and please be safe. I look forward to talking to you again next quarter. Thank you very much.

Thank you. On behalf of IIFL Institutional Equities, that concludes this conference. Thank you all for joining. You may now disconnect your lines.