ZENSARTECH - Zensar Technologies Ltd. Share Price

In the Q1 FY '26 earnings call, Zensar Technologies' management provided a cautiously optimistic outlook amid macroeconomic uncertainties. CEO Manish Tandon stated, "While we anticipate some macro-driven variability in client budgets, our diversified portfolio and focus on high-value offerings positions us well for sustained momentum."

Key forward-looking points highlighted by management include:

1. AI Integration: AI now drives 30% of Zensar's active pipeline, with over 50% of talent upskilled in AI technologies. AI-influenced wins constitute 20% of order bookings, indicating a strategic focus on AI-driven deals.

2. Revenue Growth: Q1 FY '26 revenues were reported at $162 million, reflecting a sequential growth of 3.3% in reported currency and 1.9% in constant currency. The company expressed a commitment to maintaining sequential growth, targeting sustained momentum through diversified offerings.

3. Service Line Performance: Key service lines showed growth with Telecommunication, Media & Technology up 5.5%, BFSI up 2.9%, and Healthcare up 5.2%. Conversely, Manufacturing & Consumer Services saw a decline of 4.1%.

4. Increased Order Book: An order book addition of $172 million, reflecting an 11.7% year-over-year growth, with a focus on more complex, long-term engagements.

5. Margin Projections: Management noted that upcoming salary hikes could impact margins, projecting an adjusted EBITDA margin of about 15.2%, with ongoing investments in sales and marketing also pressuring margins.

6. Macro Environment: There is caution concerning CIOs pausing net new spending due to economic uncertainties, yet the demand for AI solutions remains strong, which Zensar aims to leverage.

Overall, while management acknowledged potential headwinds, particularly within the Manufacturing and Consumer sectors, the strategic investments in AI and a healthy order pipeline position Zensar for continued growth and resilience in the coming quarters.

Major Questions and Answers from the Earnings Call Transcript:

1. Question: "Do you believe the headwinds on TMT are largely behind us? How do you see MCS going forward?" Answer: "I think the worst for TMT is behind us, but consistent growth might still be uncertain due to ongoing layoffs. For MCS, while coming off a strong Q3 last year, we expect growth in Q2 as the impact of the Liberation Day is less pronounced in other sectors."

2. Question: "From a pipeline perspective, do you think it can return to the $200 million range?" Answer: "There's uncertainty affecting our pipeline, influenced by seasonality. We're optimistic about a 12% year-over-year growth, but market uncertainty does impact our projections."

3. Question: "Can you provide insights on future margin expectations considering salary hikes and costs?" Answer: "Expect a margin impact from salary hikes implemented from July. The ASR cost will affect margins, and we are preparing for the ESOP impact. Mid-teen margins remain our guidance, but we must factor in these new costs."

4. Question: "How much more can you optimize offshore revenue delivery, and why are subcontracting costs up?" Answer: "We don't target specific offshore percentages since client demand drives our delivery model. As for subcontracting costs, there were temporary third-party costs incurred this quarter, which will normalize as headcounts stabilize."

5. Question: "What impact will the wage hike have, and which levers will offset this in the future?" Answer: "The wage hike will incur about $3 million in the next quarter. We are focused on cost optimization in other areas to counterbalance this impact, though results will take time to materialize."

6. Question: "Will you maintain your aspirational double-digit growth?" Answer: "We aim for sequential growth each quarter, having grown every quarter for the last 12 except Q3 of last year. However, I never officially committed to double-digit growth, focusing instead on predictable sustainability."

7. Question: "Can you share how AI developments have influenced your order book?" Answer: "AI is central to our strategy, with it driving 30% of our active pipeline. We've included AI-focused projects in all case studies this quarter, aiming to leverage AI to enhance our service offerings and client value."

8. Question: "What future cash usage plans do you have, including potential M&A?" Answer: "We're open to invest, including in M&A opportunities that align with our strategic goals. We've accumulated cash prudently, and any investment will be made judiciously to fuel growth without compromising our strength."

9. Question: "How's the demand in the European market, and is there any correlation with your downturns?" Answer: "We're committed to improving our execution in Europe despite past challenges. Order bookings may reflect an ongoing demand uncertainty, contributing to our mixed performance there."

10. Question: "What shifts do you see regarding vendor consolidation in competitiveness?" Answer: "We avoid chasing vendor consolidation as it leads to a race to the bottom. Our goal is to maintain relevance and avoid being subsumed in such deals, focusing instead on creating innovative solutions."