Zensar Technologies Limited (504067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Zensar Technologies Q1 FY '27 Earnings Conference Call hosted by Asian Market Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shradha Agrawal from Asian Markets Securities. Thank you, and over to you, ma'am.

Thank you, Alrik. Good morning, everyone. On behalf of Asian Markets Securities, I welcome you all to Zensar Technologies Q1 FY '27 Earnings Call. We have with us today from the management team, Mr. Manish Tandon, CEO and Managing Director; Mr. Pulkit Bhandari, Chief Financial Officer; and a few other members of the senior management team. Before I hand over the call to Manish, I would like to highlight that the safe harbor statement on the second slide of the earnings presentation is assumed to be read and understood. Over to you, sir. Thank you.

Thank you, Shradha. Hello, good morning, good afternoon and good evening, everyone. Thank you all for taking the time to join us today to discuss Zensar's financial results for the first quarter of financial year '26-'27. With me on this call are my colleagues, Pulkit Bhandari, Chief Financial Officer; and Vijayasimha, Chief Operating Officer. Let me begin with a brief perspective on the broader environment first. The global macroeconomic backdrop remains uncertain. Geopolitical volatility, shifting trade dynamics, evolving policy framework continue to weigh on business sentiment and investment allocation. Yet the IT industry has shown remarkable resilience and beneath that resilience, we see a structural shift. Clients are moving past technology modernization towards AI native transformation, reimagining entire operating models to improve service quality, reduce complexity, and unlock sustainable productivity gains. This is one of the largest opportunities our industry has seen, and Zensar is well positioned to leverage it. This quarter marked a significant milestone in our AI journey with the launch of the ZenseAI.AgentMesh, a universal enterprise platform for discovering, building, deploying and governing autonomous AI agents at scale. Building on that foundation, we have moved decisively from strategy to adoption. We are actively introducing AI native offerings, expanding partnerships across the AI ecosystem and investing in AI certified talent. Together, we strengthen our ability to help clients adopt frontier and sovereign AI innovation and capture measurable value while upholding the highest standards of governance, security and enterprise-grade controls. Turning to our financial performance for this quarter. The company registered a revenue of $159.5 million, representing a sequential quarter-on-quarter growth of 1.1% in constant currency. In INR terms, this equates to year-over-year growth of 8.9% and a sequential quarter growth of 4%, reflecting continued revenue momentum despite a dynamic demand environment. Within our vertical portfolio, banking and financial services and insurance verticals remained a strong growth driver, delivering 8.3% sequential quarter growth in constant currency. This was partially offset by softness in select markets, reflecting the stresses in the broader environment with revenues declining by 3.8% in Healthcare, Life Sciences, 2.3% in Manufacturing and Consumer Services and 9.1% in Telecom, Media & Technology. Beyond revenue, our operational metrics underscores the strength of our execution. We expanded our workforce by 5.2% sequentially. Importantly, we increased our $10 million-plus client count by 4 as compared to the same period last year. Our utilization improved to 85.1%, up 80 basis points sequentially, while voluntary attrition remained in an industry-leading low at 9.6%. Additionally, we were ranked sixth in India's best companies to work for 2026 by Great Place to Work. And this converted into an overall rank of #1 in IT services sector category. Together, these metrics reflect our disciplined operational focus enriching talent culture and continued progress against our strategic priorities as we position the business for sustainable and long-term growth. With that, I will now invite Pulkit Bhandari, our Chief Financial Officer, to provide an update on critical financial metrics.

Thank you, Manish. Good day, everyone. Thank you all for joining this call. I will take you through some of the key business and financial metrics for the quarter ending June '26. The reported revenue for the first quarter of financial year '27 stood at USD 159.5 million, reflecting a growth of 1.1% sequentially in constant currency terms. In reported terms, sequentially, it grew by 0.7%. Our EBITDA this quarter contracted by 150 bps sequentially driven by pre-staffing and transition for large deal setup, which is around 2%. Increase in other costs, which is around 1.5%, which includes increase in travel, visa and training costs. This was offset by positive ForEx impact of 0.8%, reversal of management bonuses of 1.3%. Our PAT margin for the quarter stood at 12.2% contracted by 220 bps. Some other key financial highlights. Order book stood at $149.2 million for the quarter. Our DSO improved to 75 days. Cash, including investments, stood at $317.5 million. ETR for the quarter was 25.3%. Diluted EPS for the quarter stood at INR 8 per share, which is 0.9% growth Y-o-Y. Zensar published its integrated report and BRSR for FY '25-'26. I would urge you to basically go through that. With that, I will now invite Vijay, our Chief Operating Officer, to comment further on Q1 FY '27 results.

Thank you, Manish, and Pulkit. Greetings, everyone. I will share details about our operational efficacy, service line performance and AI journey. Our utilization for the quarter stood at 85.1%, which is an improvement of 80 basis points quarter-on-quarter. The reserve associated with accelerated fulfillment and capability enrichment picked up a lot of momentum in Q1 of FY '27. We had a gross addition of 1,451 employees in the quarter, which is 50% higher than the previous quarter. Our voluntary attrition was 9.6%, as Manish just talked about. This is the sixth successive quarter where our voluntary attrition has been below 10%. The offerings from our service lines and industry services groups continue to resonate well with our clients. The share of revenues from our service lines increased to 72.1% in Q1, which is an improvement of 325 basis points Y-o-Y. On Y-o-Y reported currency basis, data engineering and analytics service line grew by 10.8%, cloud Infrastructure and Security Services grew by 5.6%, products and platforms, including CMO services grew by 1.2%, Enterprise Application Services declined by 3.2%. We continue to deliver significant value to our clients, leveraging our pragmatic AI offerings. Some examples are -- we have productionized agent-based software development and testing life cycles across multiple global BFSI clients. With this, we were able to achieve 25-plus percent productivity uplift with 44% of the code being AI generated and 50% to 60% acceleration on large-scale application migrations. We replatform legacy estates, including mainframe COBOL environments to modern architectures through repeatable technology-agnostic agentic workflows, achieving 40% to 60% effort savings. We have ZenseAI platform family across many accounts. These include ZenseAI.QI which is our quality engineering set of agents, the newly launched Azure AI for agent assurance, AgentMesh that Manish talked about, which comprises of banking and risk assistant agents and ZenseAI.Guidewire, which is the insurance platform delivery acceleration suite. We had won multiple projects, leveraging AI native SDLC where we are using GHCP, Claude code, et cetera, as well as our agentic engineering methodologies while simultaneously driving outcomes with ZenseAI-led managed services. Our content factory suite of agents is being leveraged to run marketing campaigns for many marquee clients. With that, we can now open the line for questions.

[Operator Instructions] The first question comes from the line of Shradha Agrawal with Asian Markets Securities.

Two questions, Manish. First is on BFSI. We saw a sharp 8% growth in this quarter in BFSI. So how much of it is to do with the large $210 million deal ramp-up? And ex of that, how has BFSI performed? And then I'll ask the second one.

Yes. So some parts of it -- so we started executing this deal in mid-February. So the transition and so on is going on. But still, there was contribution from this. I don't think we would like to disclose the contribution. But beyond that, also to your second question, BFSI grew despite -- even if we had not accounted for the large deal, BFSI still grew.

So I think earlier, the plan was that the field would ramp up in a material way in 3Q. So are we running ahead of our initial plans and the deal has seen some good ramp-up in the first quarter itself?

I mean we -- as a company, we try to execute very well. So we were anticipating -- I mean, first of all, it's half quarter only. So that is what you need to remember. Second is most of it was transition related. So it is not that we have been able to get all the revenues that we wanted in the first quarter -- in this quarter itself. But again, it's a process. I think Q2 and Q3, we will -- Q2 also, I think, will continue to ramp up. And the full weight or the revenues of this deal should start appear in Q3, Q4.

Got it. And the other question is, Manish, that many of your larger peers have also called out that they are entering the small and midsized enterprises market by carving out a different business unit to focus on this segment. So if you could also talk about the competitive intensity that you've seen in the last few months given the higher focus of larger peers in this SME segment?

See the -- I mean, see the competitive intensity has continued to increase because the market conditions, you are aware, you have seen the results of other companies also. So the market conditions, the competitiveness of that has increased. We are not too worried about the large companies entering into this segment. Because their operations, their processes, their -- the overall structure is not really designed for SMB overall. SMBs need different type of execution agility, which is when your client number 350 for a large company, there is that limited amount of bandwidth, talent, leadership management capability that will focus on it. So that is, I think, going to be the primary issue for the larger players.

Right. And if last one question I can squeeze in. The fresh order intake at broadly $149 million is at a multi-quarter low number. So how do you look at the pipeline? And what should we expect in terms of TCV wins for the remaining quarters of the year?

Yes. So first of all, $150 million approximately is the number. But the interesting thing in this number is that new business, proportion of new business, which is new business from existing clients and net new is at an all-time high for us. And usually, Q1 usually is a seasonally weak quarter because most of the renewals either happen in Q3 or Q4, depending on when the budget cycles and the financial year cycles of our clients are. So we are not unduly worried, because as I said, the proportion of EN and NN in this is much higher than what we have seen in the past. And Shradha, you should also remember that we were coming out of a bumper quarter last quarter with nearly $450 million or so in order bookings. So I wouldn't be too worried about it.

The next question comes from the line of Nitin Padmanabhan with Investec India.

Nice to see the growth in BFSI beyond the deal. Just a few questions on how do you think -- the other verticals, which have been sort of declining, which includes MCS, HLS, PMP, do you think that should start moderating? Or do you think MCS or HLS should start sort of improving at some point? So that's the first one. The second is that from a deal win perspective, do you believe that the book-to-bill should start increasing going forward? Because considering the leak that we are seeing with the other verticals, unless there's a 1.2x, 1.3x, it becomes slightly difficult. So I wanted your thoughts on how you're thinking about that and how that could sort of change. And finally, just a question on how should we think about margins from a puts and takes perspective on a going forward basis?

All right. So first question is commentary on vertical. Again, what is passed is past, but I can tell you that on -- at this moment, I am less bullish about what we are seeing in Europe, what I am seeing in Europe and what I'm seeing in MCS or consumer services. I think, Africa, we are doing well. I mean, one-off cases here and there is not the problem. BFSI, obviously, we are doing very well. And actually, in PMC, if you leave aside the largest client, we are actually doing quite well. On HLS, when we started the year, we expected it to be much higher because of consolidation. And we have recovered there at least, I would say, 75% of the drop that we are -- that we had. So HLS, I think we will continue to see growth in the subsequent quarter also. So that is the overall commentary. On book-to-bill, See this -- see, you have to factor in the mega deal. Okay. Last quarter, we had a book-to-bill of whatever, 3x or something like that, correct? So the overall book-to-bill can be lower in subsequent quarters because there is a mega deal, which is where we booked $430 million or whatever total in that quarter. So if you look at that, I mean, you have to say that the book-to-bill metrics can be lower without us getting uncomfortable with it. But with that said, we would like to maintain our original thinking around 0.9 to 1.1x of projected revenue.

Does that answer your question?

Yes, yes. So yes, that's helpful. My only thought process was the 0.9 to 1x would have been great when we didn't have the leak from the top line and the others. So in that context, wouldn't you want to build on a larger funnel and drive higher book-to-bill was where I was coming from. And I think the question on margins was the last one.

Yes. On margins, I'll let Pulkit comment on the margin. But I think the jury is still out there. But I think at least we -- I feel that this slowdown in the largest client might be more muted going forward. Particularly, see because there is not too much to go down from there. So that perhaps should mitigate your concerns. Pulkit, over to you on the margins.

Sure, sure. Nitin, on your question around margins. I think let me basically start with what our priorities are from an investment perspective. Priority one is, of course, building capabilities, investing in SG&A as and when needed. And third and most important is basically ramp-up of the large deals. And to that extent, at least for Q2 and Q3, we would expect the margins to be in the similar range as what we are seeing in Q1 because the ramp-up in growth are priority. And eventually, once we have achieved that, margins will follow from Q3 onwards. So I would say, at least for next 1 to 2 quarters, the priority will be around investments in SG&A, capability building on AI and lastly, ramping up the large deal.

[Operator Instructions] The next question comes from the line of Sucrit Patil with Eyesight Fintrade.

First question to Mr. Manish is with a forward-looking guidance on beyond the regular outlook, what are the top 2 to 3 execution priorities you're focusing on in the next 2 quarters? And alongside that, what do you see as the bigger risk in client demand shift or competitive pressures? And how are you planning to manage them while strengthening Zensar Solution in the IT services and digital space. That's the first question. I'll ask my second question after this.

Yes. So priorities, I think -- priority #1 is maintaining the Zensar and AI-native organization. So from a management perspective, a lot of effort, serious execution, bandwidth, et cetera, is going there. And we don't want to just become AI native for ourselves. We want to become AI native for our clients. So that is where -- that is the priority number 1 and 2. Priority 3 is as Pulkit mentioned, making sure that the mega deal ramp-up goes smoothly, and we continue to invest in that and in our SG&A to get the ball rolling on revenue growth. Did I answer your first question?

Yes, yes. That was pretty good guidance. My second question to Mr. Pulkit is again, along the similar lines. From a financial point of view, what key risks or challenges do you anticipate in the coming quarters? And what specific measures are being taken to manage margin, cash flow and balance sheet strength especially in areas like currency volatility, receivables or any compliance?

Yes, that's -- thank you. That's a very wide question, and I'll try and basically take every point. So on margins, as what we stated, right, the priorities and focus on growth that will drive. Our margins, at least for the next couple of quarters will be similar to what you see in Q1. We do not -- we are investing. And to that extent, we do not see any large expansion there as of now, yes. But on growth, the priority stays as strong as it was before. Second, you said how is the balance sheet and any risks there. Our EBITDA to cash conversion is, again, pretty good. It was -- OCF to EBITDA this quarter was somewhere close to 70%, a little more than 70%. Historically, also, our cash conversion has been pretty strong. I would like to believe that it has been higher than the industry average for the last 2 years. On anything on receivable side, it's business as usual, no major callouts. Our DSO, when we ended FY '26, it was 71 days. which was, if I recall, #2 in the industry, when we are closing in Q1, it is 75 days, which is, again, pretty good as a number, and we are okay with that kind of a trajectory. What we are seeing as a trend is that the payment terms are getting stretched, and to that extent, anything which is between 74 to, say, 79 is an okay number from our angle.