Zensar Technologies maintains a NEUTRAL rating with a target price of ₹730. That's an 8% downside from the current price of ₹798.
The company reported flat revenue growth in Q2FY26 as the TMT (Technology, Media & Telecom) vertical declined 10.2%, offsetting gains in BFSI. EBIT margin came in at 13.7%, slightly above estimates of 13.4%. Management reiterated its mid-teens margin guidance, but growth momentum remains elusive.
The rating reflects a wait-and-watch stance. Here's what's holding back a more constructive view:
1. Growth Momentum Yet to Turn
Revenue remained flat in constant currency terms during Q2FY26. The macro environment shows no meaningful change, with clients remaining cautious on discretionary tech spends. Deal delays post the 'Liberation Day' tariff announcements have added to uncertainty. Q3 is expected to see typical furlough-related softness.
2. TMT Vertical Continues to Drag
The Hi-Tech vertical declined 10.2% QoQ in constant currency terms. Client budgets are shifting from opex to capex, notably into GPUs and data centers. If not for the TMT decline, overall company growth would have been approximately 4% higher.
3. Deal TCV Trending Lower
Bookings came in at $159 million, down 8% QoQ and 21% YoY. While the pipeline remains healthy with a strong large-deal funnel, conversion timelines remain uncertain. Summer-related decision deferrals in Europe added to the slowdown.
4. Valuation Not Compelling
At 25x FY26E earnings and 23x FY27E earnings, the stock isn't cheap for a company delivering flat growth. The PEG ratio (PE divided by growth) looks stretched given single-digit earnings growth expectations.
Revenue: $163 million (flat QoQ CC vs estimate of -0.5%)
EBIT Margin: 13.7% (vs estimate of 13.4%), up 20bp QoQ
PAT: ₹1,821 million (up 17% YoY), above estimate of ₹1,739 million
BFSI: Grew 4.8% QoQ CC
Healthcare: Grew 3.9% QoQ CC
Utilization: Rose 50bp QoQ to 84.8%
Offshore Mix: Improved to 54.2% vs 50.3% YoY
Attrition: Stable at 9.8% LTM
What Missed:
TMT: Declined 10.2% QoQ CC
Manufacturing: Down 0.6% QoQ CC
Deal TCV: $159 million (down 8% QoQ, down 21% YoY)
North America: Declined 1.8% QoQ CC due to TMT client base
Headcount: Dropped 0.6% QoQ to 10,550
The margin beat is encouraging, but flat revenue growth in a seasonally strong quarter raises questions about underlying demand.
Vertical-Wise Performance: A Mixed Bag
Vertical
Revenue Contribution
QoQ Growth (CC)
Banking (BFSI)
43.6%
+4.8%
Manufacturing
25.2%
-0.6%
Hi-Tech (TMT)
20.0%
-10.2%
Healthcare
11.2%
+3.9%
1. BFSI (43.6% of revenue): The largest vertical continued to perform well, supported by steady client demand and vendor consolidation opportunities. Growth of 4.8% QoQ CC is healthy.
2. Manufacturing (25.2% of revenue): Growth momentum is picking up with a healthy pipeline, though Q2 saw a marginal decline of 0.6%. Modernization mandates are driving traction.
3. Hi-Tech/TMT (20.0% of revenue): The problem child. Down 10.2% QoQ as clients shift budgets from operational spending to capital expenditure on GPUs and data centers. The good news? Exposure has declined from 27% in FY24 to 20% now, limiting future impact.
4. Healthcare (11.2% of revenue): Steady growth of 3.9% QoQ. Expected to mirror traction seen in retail and CPG going forward.
Geography-Wise Performance
Geography
Revenue Contribution
QoQ Growth (CC)
North America
66.6%
-1.8%
Europe
21.5%
+4.0%
Africa
11.9%
+3.3%
North America saw a drag due to the TMT client base concentration. Europe showed better performance despite summer-related decision deferrals.
The TMT Problem: When Will It End?
Here's the context on Zensar's biggest headwind:
What's Happening Actually?
Technology clients are redirecting budgets from operational IT spending (where Zensar earns revenue) to capital investments in GPUs, data centers, and AI infrastructure. This structural shift is hurting the traditional IT services model.
The Silver Lining Zensar's TMT exposure has declined from 27% of revenue in FY24 to 20% in Q2FY26. This should limit the future impact relative to peers with higher tech exposure. The worst of the correction is likely behind.
You need to watch a sustained recovery in TMT through 2HFY26 and that will be a key monitorable. Management expects some stabilization, but timing remains uncertain.
Deal Pipeline and TCV: The Conversion Challenge
Deal TCV at $159 million looks weak at first glance:
Down 8% QoQ
Down 21% YoY
Book-to-bill ratio at 1.0x (just enough to maintain current revenue)
Why the Decline?
Lower renewals (typically concentrated in Q4 and Q1) and Europe's summer-related decision deferrals impacted bookings. A reasonable portion of the current order book consists of net-new deals.
The AI Angle: AI-infused deals contributed 28% of total bookings vs 21% in the prior quarter. This reflects growing client interest in AI-led transformation. However, revenue conversion from these wins will take time to reflect meaningfully.
The underlying pipeline remains healthy with a strong large-deal funnel. Management expects some of these deals to convert in the coming quarter. But until we see actual conversion, it remains a promise rather than performance.
Margin Performance: The Bright Spot
EBIT margin at 13.7% is the one genuine positive in this quarter. Here's how Zensar achieved margin expansion despite wage hikes:
Margin Walk:
Wage hikes impact: -$3.2 million
Higher utilization: +50bp to 84.8%
Improved offshore mix: 54.2% vs 50.3% YoY
FX tailwinds: Positive contribution
Cost optimization: Ongoing benefits
Guidance Management reiterated its mid-teens margin outlook for the foreseeable future. EBITDA margins estimated at 15.5% for FY26E and 15.6% for FY27E.
ESOP Impact New ESOP expense effective from mid-September had limited impact in Q2 (only 18 days). Full-quarter impact will flow through from Q3.
Financial Outlook: FY26-28
Steady but unexciting growth is the outlook. Revenue projected to grow at 6% CAGR from FY26 to FY28.
Growth Trajectory:
Metric
FY25
FY26E
FY27E
FY28E
Revenue (₹M)
52,806
57,415
60,878
64,326
Revenue Growth
7.7%
8.7%
6.0%
5.7%
EBITDA Margin
15.5%
15.5%
15.6%
16.0%
PAT (₹M)
6,498
7,290
7,826
8,393
EPS (₹)
28.4
31.7
34.1
36.5
ROE
17.0%
17.2%
17.0%
16.9%
1. Revenue Outlook: USD revenue expected to grow at 5% in FY26 and 4.7% in FY27. This is below industry growth rates for top-tier IT companies. BFSI and Manufacturing should drive a steadier growth base, while TMT recovery remains the wildcard.
2. Earnings Growth: PAT CAGR of 10% expected over FY25-27E. EPS to climb from ₹28.4 (FY25) to ₹36.5 (FY28). This isn't exciting enough to justify current valuations.
3. Return Ratios: ROE stable around 17%. ROCE flat at 13.3-13.4%. No meaningful improvement expected in capital efficiency.
1. On Demand Environment: "The overall macro environment remains largely unchanged, with evolving US policies, particularly around trade tariffs and visa regulations, continuing to pose challenges."
2. On AI Investments: "AI-led investments are being prioritized, while non-AI discretionary spend remains subdued." AI is currently viewed as a competitive differentiator rather than a direct margin productivity lever.
3. On H1-B Visa Risk: "H1-B dependency remains very low (less than 3% of workforce). The company continues to focus on local hiring, with minimal impact expected from visa-related policy changes next year."
4. On Q3 Outlook: "3Q is typically a seasonally weak quarter for the industry due to furloughs, though the impact on Zensar is expected to be relatively lower this year given reduced exposure to the TMT vertical."
Why ₹730 Target Price?
Zensar is valued at 21x June 2027E EPS, arriving at ₹730.
Current Valuations:
25.1x FY26E earnings
23.4x FY27E earnings
21.8x FY28E earnings
At these multiples with single-digit earnings growth, the valuation appears full. The stock needs either faster growth or cheaper valuations to warrant a more positive view.
Comparison with Peers: Larger IT companies like HCL Tech trade at similar multiples but deliver faster growth and have stronger AI positioning. Mid-tier IT peers with better growth trajectories may offer better risk-reward.
The target price is ₹730, representing 8% downside from the current price of ₹798. The target is based on 21x June 2027E EPS. The NEUTRAL rating reflects concerns about growth momentum despite steady margin execution.
2. Is Zensar Technologies a good stock to buy now?
The stock carries a NEUTRAL rating, suggesting investors should wait on the sidelines. While margin execution is solid, flat revenue growth and declining deal TCV raise concerns. The valuation at 23x FY27E isn't compelling for single-digit earnings growth.
3. What were Zensar's Q2FY26 results?
Q2FY26: Revenue $163 million (flat QoQ CC), EBIT margin 13.7% (up 20bp QoQ), PAT ₹1,821 million (up 17% YoY). BFSI grew 4.8% while TMT declined 10.2%. Deal TCV at $159 million was down 8% QoQ and 21% YoY.
4. Why is Zensar's TMT vertical declining?
Technology clients are shifting budgets from operational IT spending to capital investments in GPUs and data centers. This structural shift is hurting traditional IT services revenue. Zensar's TMT exposure has declined from 27% in FY24 to 20%, limiting future impact.
5. What is Zensar's margin outlook?
Management reiterated mid-teens margin guidance. EBITDA margins expected at 15.5% for FY26E and 15.6% for FY27E. EBIT margin at 13.7% despite wage hike impact reflects sound operational control through higher utilization and improved offshore mix.
6. What are the main risks with Zensar?
TMT recovery uncertainty, deal conversion delays, cautious client discretionary spending, North America weakness due to tech client concentration, and stretched valuation relative to growth. The target price implies 8% downside.
7. What is Zensar's AI exposure?
AI-infused deals contributed 28% of total bookings in Q2 vs 21% in Q1. However, AI is currently viewed as a competitive differentiator rather than a direct margin productivity lever. Revenue conversion from AI wins will take time.
8. When could Zensar be upgraded to BUY?
Clearer signs of traction in TMT recovery and faster deal-to-revenue conversion would warrant a more constructive view. Sustained growth improvement over 2-3 quarters would likely trigger a rating upgrade.
The Bottom Line for Zensar Technologies
Zensar Technologies shows solid margin execution but lacks the growth momentum to justify current valuations. The TMT drag, while reducing in impact, continues to offset gains in BFSI and Healthcare.
The NEUTRAL rating with ₹730 target (8% downside) reflects a wait-and-watch stance. Investors should look for clearer signs of TMT recovery and deal TCV improvement before building positions.
At 23x FY27E earnings with single-digit earnings growth, the risk-reward isn't attractive. For IT sector exposure, larger peers with better AI positioning and faster growth trajectories may offer better alternatives at current levels.
