The quarter's performance reflects a company balancing growth aspirations with margin pressures. Whilst revenue expanded to ₹1,421.30 crores—marking the highest quarterly sales figure in recent history—operating margins excluding other income remained relatively flat at 15.48%, raising questions about the sustainability of profitability improvements in an increasingly competitive landscape.
The Pune-headquartered technology services firm, promoted with foreign collaborators including ICL UK, Fujitsu Japan, and Northern Telecom Canada since 1963, has carved a niche in digital transformation services. However, the latest quarterly results reveal a company at an inflection point—demonstrating consistent top-line growth whilst grappling with employee cost inflation and margin compression that warrant close investor scrutiny.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 |
|---|---|---|---|---|---|---|
| Revenue (₹ Cr) | 1,421.30 | 1,385.00 | 1,358.90 | 1,325.60 | 1,308.00 | 1,288.10 |
| QoQ Growth | +2.62% | +1.92% | +2.51% | +1.35% | +1.54% | +4.75% |
| Net Profit (₹ Cr) | 182.20 | 182.00 | 176.40 | 159.80 | 155.70 | 157.90 |
| QoQ Growth | +0.11% | +3.17% | +10.39% | +2.63% | -1.39% | -8.89% |
| Operating Margin | 15.48% | 15.21% | 15.64% | 15.62% | 15.37% | 15.23% |
| PAT Margin | 12.82% | 13.14% | 12.98% | 12.05% | 11.90% | 12.26% |
Financial Performance: Consistent Growth, Margin Vigilance Required
Zensar Technologies delivered its eighth consecutive quarter of sequential revenue growth in Q2 FY26, with net sales reaching ₹1,421.30 crores, representing a 2.62% quarter-on-quarter expansion and an 8.66% year-on-year improvement. This consistent top-line momentum demonstrates the company's ability to win incremental business in a subdued demand environment that has challenged many mid-tier IT services providers.
However, the revenue growth story comes with a caveat. Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹220.00 crores in Q2 FY26, translating to an operating margin of 15.48%—a modest 27 basis points improvement from the previous quarter's 15.21%. Whilst this sequential improvement is encouraging, the margin remains below the 16.51% achieved in March 2024, indicating persistent cost pressures that have yet to be fully addressed.
The profitability picture reveals a company heavily reliant on other income to bolster bottom-line performance. Other income contributed ₹49.10 crores in Q2 FY26, representing approximately 20.4% of profit before tax. Whilst other income declined from ₹56.70 crores in the previous quarter, it remains a significant component of overall profitability—a dependency that raises questions about core operational earnings quality.
Net profit of ₹182.20 crores in Q2 FY26 reflects a PAT margin of 12.82%, down from 13.14% in Q1 FY26. This 32 basis points margin compression at the net profit level, despite improved operating margins, highlights the impact of higher employee costs which surged to ₹925.20 crores from ₹876.10 crores quarter-on-quarter—a substantial 5.6% sequential increase.
Revenue (Q2 FY26)
Net Profit (Q2 FY26)
Operating Margin
PAT Margin
Operational Dynamics: Employee Cost Inflation Challenges Margin Expansion
The most significant operational challenge facing Zensar Technologies in Q2 FY26 was the sharp escalation in employee costs, which reached ₹925.20 crores—representing 65.1% of revenue, up from 63.3% in the previous quarter. This 180 basis points increase in employee cost as a percentage of revenue reflects wage inflation, potential headcount additions, and the impact of annual salary increments that typically occur in the first half of the fiscal year for Indian IT services companies.
The company's return on equity of 15.97% for the latest period, whilst representing an improvement from the average ROE of 14.57%, remains modest compared to industry leaders. Higher ROE indicates better capital efficiency and profitability—a metric where Zensar has room for substantial improvement. The company's ability to generate returns on shareholder capital lags behind top-tier IT services providers, suggesting that whilst growth is being achieved, it is not translating into proportionate value creation for equity holders.
On a more positive note, Zensar's balance sheet remains robust with zero long-term debt as of March 2025 and a negative net debt-to-equity ratio of -0.46, indicating the company is a net cash entity. Shareholder funds stood at ₹4,069.70 crores, up from ₹3,561.90 crores in the previous year, demonstrating healthy retained earnings accumulation. The company's fixed assets increased to ₹1,072.70 crores from ₹891.40 crores, suggesting ongoing investments in infrastructure and capabilities.
Return on capital employed (ROCE) of 32.53% for the latest period significantly exceeds the average ROCE of 26.72%, indicating improved efficiency in deploying capital. This strong ROCE, combined with negligible debt levels, positions Zensar favourably from a financial stability perspective, even as margin pressures persist.
⚠️ Margin Pressure Alert
Employee Cost Escalation: Employee costs surged to 65.1% of revenue in Q2 FY26 from 63.3% in Q1 FY26, representing a sharp 180 basis points deterioration. This cost inflation is outpacing revenue growth and compressing net margins despite sequential operating margin improvements. Management's ability to optimise workforce productivity and control attrition will be critical to margin recovery in subsequent quarters.
Industry Context: Navigating Subdued Demand in Global IT Services
The global IT services industry continues to face headwinds from cautious enterprise spending, particularly in key markets such as North America and Europe. Clients across sectors are prioritising cost optimisation over large-scale digital transformation initiatives, leading to elongated deal cycles and pressure on discretionary spending. In this environment, mid-tier IT services providers like Zensar face intense competition from both larger integrated players and nimble niche specialists.
Zensar's performance in Q2 FY26 reflects the broader industry trend of modest growth amidst margin pressures. The company's 8.66% year-on-year revenue growth outpaces many peers in the small-cap IT services segment, suggesting effective client engagement and deal execution. However, the challenge of maintaining pricing power whilst absorbing wage inflation remains a sector-wide concern.
The company's specialisation in digital transformation services—encompassing cloud migration, data analytics, and customer experience solutions—positions it well for long-term secular growth trends. However, near-term demand visibility remains constrained, with clients exercising caution on project approvals and preferring shorter-duration engagements over multi-year transformation programmes.
Competitive Positioning
Zensar's focus on mid-market clients across retail, banking, and manufacturing verticals provides diversification but also exposes the company to budget constraints in these sectors. Unlike larger peers with significant exposure to high-margin consulting and platform services, Zensar derives a substantial portion of revenue from traditional application development and maintenance work, which faces ongoing commoditisation pressure. The company's ability to shift its revenue mix towards higher-value digital services will be crucial for sustainable margin expansion.
Peer Comparison: Valuation Discount Reflects Growth and Profitability Gap
When benchmarked against industry peers, Zensar Technologies trades at a significant valuation discount, reflecting both its smaller scale and lower profitability metrics. The company's price-to-earnings ratio of 26.82x appears reasonable compared to peers such as Tata Technologies (40.50x), Inventurus Knowledge (58.14x), and Affle (67.62x), but this discount is justified by fundamental performance gaps.
Zensar's return on equity of 14.57% lags considerably behind peers such as Inventurus Knowledge (29.58%), Netweb Technologies (21.48%), and Tata Technologies (20.00%). This ROE differential explains much of the valuation gap, as investors assign premium multiples to companies demonstrating superior capital efficiency. The company's price-to-book ratio of 4.44x, whilst lower than peers like Netweb Technologies (43.15x) and Inventurus Knowledge (15.79x), still reflects expectations of moderate growth and profitability improvement.
| Company | P/E (TTM) | P/BV | ROE % | Div Yield | Debt/Equity |
|---|---|---|---|---|---|
| Zensar Tech. | 26.82 | 4.44 | 14.57% | 0.25% | -0.46 |
| Tata Technologies | 40.50 | 7.84 | 20.00% | 1.69% | -0.36 |
| Inventurus Knowledge | 58.14 | 15.79 | 29.58% | NA | 0.37 |
| Affle | 67.62 | 9.20 | 19.46% | NA | -0.44 |
| Netweb Technologies | 177.22 | 43.15 | 21.48% | 0.06% | -0.32 |
From a dividend perspective, Zensar's yield of 0.25% is amongst the lowest in the peer group, with Tata Technologies offering a significantly higher 1.69%. The company's dividend payout ratio of 45.41% suggests room for increased shareholder returns, though management appears to be prioritising capital allocation towards growth investments and balance sheet strengthening.
Valuation Analysis: Fair Value with Limited Near-Term Upside
At the current market price of ₹795.00, Zensar Technologies trades at a price-to-earnings ratio of 27x trailing twelve-month earnings—broadly in line with the industry average P/E of 28x. This valuation appears fair when considering the company's growth trajectory, profitability profile, and balance sheet strength. However, the stock's PEG ratio of 26.82 suggests that the current valuation may not adequately account for the company's modest growth prospects relative to its P/E multiple.
The stock has retreated 19.29% from its 52-week high of ₹985.00, whilst remaining 42.35% above its 52-week low of ₹558.50. This positioning suggests the market has tempered earlier optimism about the company's growth prospects, with the recent correction bringing valuations closer to fundamental reality. The company's EV/EBITDA multiple of 19.49x and EV/EBIT of 22.17x are reasonable for a mid-tier IT services provider with stable cash generation.
Book value per share stands at ₹179.28, implying the stock trades at 4.44 times book value. For a company with ROE of approximately 16%, this price-to-book multiple appears justified, though it leaves limited room for multiple expansion without corresponding improvements in return ratios.
P/E Ratio (TTM)
P/BV Ratio
Dividend Yield
Mojo Score
Shareholding Pattern: Institutional Confidence Building Gradually
The shareholding pattern for Q2 FY26 reveals interesting institutional dynamics. Promoter holding declined marginally to 49.02% from 49.06% in the previous quarter, continuing a gradual reduction trend that has seen promoter stake decrease from 49.13% in September 2024. Whilst this dilution is minimal, it reflects ongoing promoter monetisation or employee stock option exercises.
More significantly, mutual fund holdings increased sharply to 19.55% from 17.88% in Q1 FY26—a substantial 167 basis points sequential increase that signals growing institutional confidence. This marks the highest mutual fund holding in recent quarters and suggests that domestic institutional investors are accumulating the stock at current valuations, viewing it as attractively priced relative to growth prospects.
Conversely, foreign institutional investor (FII) holdings declined to 13.30% from 14.56%, representing a 126 basis points reduction. This divergence between domestic and foreign institutional investor sentiment is noteworthy. Whilst domestic mutual funds are increasing exposure, FIIs appear to be trimming positions, potentially reflecting concerns about near-term growth visibility or sector rotation strategies.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 49.02% | 49.06% | 49.07% | -0.04% |
| FII | 13.30% | 14.56% | 14.98% | -1.26% |
| Mutual Funds | 19.55% | 17.88% | 17.39% | +1.67% |
| Insurance | 1.50% | 1.40% | 1.35% | +0.10% |
| Other DII | 1.20% | 1.24% | 1.15% | -0.04% |
| Non-Institutional | 15.43% | 15.86% | 16.06% | -0.43% |
Insurance company holdings increased modestly to 1.50% from 1.40%, whilst other domestic institutional investor holdings declined slightly to 1.20% from 1.24%. Overall institutional holdings stand at 35.54%, a healthy level that provides liquidity and professional oversight, though still below levels seen in larger-cap IT services peers.
Stock Performance: Underperformance Against Broader Market
Zensar Technologies' stock performance over recent periods reveals a mixed picture. Over the past year, the stock has delivered returns of 13.40%, outperforming the Sensex's 5.73% gain by 767 basis points. However, this outperformance masks significant underperformance in shorter timeframes, with the stock declining 1.91% over three months compared to the Sensex's 3.39% gain—a negative alpha of 530 basis points.
The stock's year-to-date performance of 5.99% lags the Sensex's 7.42% return, indicating that the earlier momentum witnessed in the stock has dissipated. Over the past week, the stock declined 1.30% compared to the Sensex's 0.32% decline, suggesting continued near-term weakness. The one-month performance of 3.40% marginally trails the Sensex's 3.65% gain.
Longer-term performance metrics are more impressive. Over two years, Zensar has delivered returns of 62.31% compared to the Sensex's 31.41%—a substantial outperformance of 3,090 basis points. The three-year return of 254.83% significantly exceeds the Sensex's 38.18%, demonstrating the stock's ability to generate wealth for patient investors during periods of operational improvement and sector tailwinds.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -1.30% | -0.32% | -0.98% |
| 1 Month | 3.40% | 3.65% | -0.25% |
| 3 Months | -1.91% | 3.39% | -5.30% |
| 6 Months | 10.65% | 4.61% | +6.04% |
| YTD | 5.99% | 7.42% | -1.43% |
| 1 Year | 13.40% | 5.73% | +7.67% |
| 2 Years | 62.31% | 31.41% | +30.90% |
| 3 Years | 254.83% | 38.18% | +216.65% |
The stock's volatility of 40.09% over the past year significantly exceeds the Sensex's 12.50%, reflecting its high-beta nature (beta of 1.35). This elevated volatility classifies Zensar as a "high beta" stock that amplifies market movements, making it suitable primarily for investors with higher risk tolerance. The risk-adjusted return of 0.33 compares unfavourably to the Sensex's 0.46, indicating that the stock's returns do not adequately compensate for the additional volatility risk.
Investment Thesis: Stability with Limited Catalysts
Zensar Technologies presents a mixed investment case characterised by operational stability, strong balance sheet fundamentals, and consistent growth, but constrained by margin pressures, modest return ratios, and limited near-term catalysts for significant re-rating. The company's Mojo score of 68 out of 100 translates to a "HOLD" rating, reflecting this balanced assessment.
The investment thesis rests on several positive factors: zero debt, healthy cash generation, consistent revenue growth, and improving institutional participation. The company's specialisation in digital transformation services positions it favourably for long-term secular trends, whilst its diversified client base across retail, banking, and manufacturing provides revenue stability.
However, several concerns temper enthusiasm. The sharp increase in employee costs as a percentage of revenue raises questions about workforce productivity and pricing power. The company's ROE of approximately 16%, whilst acceptable, lags industry leaders and suggests limited value creation relative to capital employed. The heavy reliance on other income to support profitability raises questions about core operational earnings quality.
Valuation
Quality Grade
Financial Trend
Technical Trend
Key Strengths & Risk Factors
✓ KEY STRENGTHS
- Zero Debt Balance Sheet: Net cash position with debt-to-equity of -0.46 provides financial flexibility and resilience
- Consistent Revenue Growth: Eight consecutive quarters of sequential top-line expansion demonstrates execution capability
- Strong ROCE: Return on capital employed of 32.53% indicates efficient capital deployment
- Improving Institutional Participation: Mutual fund holdings increased to 19.55%, signalling growing domestic confidence
- Diversified Client Base: Exposure across retail, banking, and manufacturing sectors reduces concentration risk
- Digital Services Focus: Specialisation in cloud, analytics, and customer experience aligns with secular growth trends
- Healthy Cash Generation: Operating cash flow of ₹565 crores in FY25 supports dividend payments and growth investments
⚠ KEY CONCERNS
- Employee Cost Inflation: Sharp increase to 65.1% of revenue compresses margins and threatens profitability
- Modest ROE: Return on equity of 15.97% lags industry leaders, indicating suboptimal capital efficiency
- Other Income Dependency: Significant reliance on other income (20.4% of PBT) raises earnings quality concerns
- Margin Compression: PAT margin declined 32 bps QoQ despite operating margin improvement
- High Valuation Relative to Growth: PEG ratio of 26.82 suggests limited upside at current multiples
- FII Selling: Foreign institutional investors reduced holdings by 126 bps, indicating concerns about growth visibility
- High Volatility: Beta of 1.35 and volatility of 40.09% make the stock unsuitable for conservative investors
Outlook: What to Watch in Coming Quarters
POSITIVE CATALYSTS
- Margin Recovery: Successful workforce optimisation and pricing improvements leading to sustained margin expansion above 16%
- Large Deal Wins: Announcement of multi-year transformation deals that enhance revenue visibility and growth trajectory
- Digital Revenue Mix: Increasing proportion of high-margin digital services revenue exceeding 60% of total revenue
- Institutional Accumulation: Continued increase in mutual fund and insurance company holdings signalling confidence
- ROE Improvement: Sustained ROE above 18% demonstrating improved capital efficiency and value creation
RED FLAGS TO MONITOR
- Further Margin Deterioration: Operating margins declining below 15% would indicate structural profitability challenges
- Revenue Growth Deceleration: Sequential revenue decline or growth below 1% QoQ signalling demand weakness
- Attrition Spike: Sharp increase in employee attrition leading to higher recruitment and training costs
- FII Exodus: Continued reduction in foreign institutional holdings below 12% indicating loss of confidence
- Client Concentration: Increased dependence on top clients raising revenue concentration risk
"Zensar Technologies represents a stable, debt-free IT services provider delivering consistent growth, but margin pressures and modest return ratios limit near-term re-rating potential—a hold for existing investors, caution for fresh buyers."
The Verdict: Operational Stability Meets Valuation Constraints
Score: 68/100
For Fresh Investors: Not recommended for fresh accumulation at current levels. The stock trades at fair valuations with limited upside catalysts in the near term. Await margin improvement and clearer growth visibility before initiating positions. Better entry opportunities may emerge on corrections towards ₹720-740 levels.
For Existing Holders: Continue to hold positions with a medium-term perspective. The company's strong balance sheet, consistent growth, and improving institutional participation provide a stable foundation. Monitor quarterly results for evidence of sustained margin expansion and ROE improvement. Consider partial profit booking if stock rallies towards ₹850-870 levels.
Fair Value Estimate: ₹820-840 (3-6% upside from current levels)
Rationale: Zensar Technologies earns a HOLD rating based on its operational stability, zero-debt balance sheet, and consistent revenue growth, balanced against margin pressures from employee cost inflation and modest return on equity that lags industry leaders. The fair valuation at 27x P/E with a PEG ratio of 26.82 suggests limited multiple expansion potential without corresponding improvements in profitability metrics. Increasing mutual fund holdings provide support, but declining FII participation raises concerns about near-term growth visibility. The stock is suitable for patient investors seeking exposure to mid-tier IT services with strong fundamentals, but lacks compelling catalysts for fresh accumulation at current prices.
