Zensar Technologies Q3 FY26: Margin Expansion Drives 25% Profit Surge Despite Muted Revenue Growth

The December 2025 quarter results underscore a company executing well on operational efficiency whilst navigating a demand environment that remains tepid across the IT services sector. Net sales grew a modest 0.66% quarter-on-quarter to ₹1,430.70 crores from ₹1,421.30 crores, marking the seventh consecutive quarter of sequential revenue growth albeit at decelerating pace. On a year-on-year basis, revenue expanded 7.93%, significantly outpacing the broader IT services sector which has struggled with budget constraints and discretionary spending cuts from global clients.

Financial Performance: Margin Magic Compensates for Revenue Slowdown

The standout feature of Q3 FY26 was the sharp margin expansion across profitability metrics. Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) surged to ₹249.90 crores, up 13.64% quarter-on-quarter and 20.72% year-on-year. More importantly, operating margins expanded dramatically to 17.47% from 15.48% in Q2 FY26 and 15.62% in Q3 FY25—a remarkable 185 basis points improvement year-on-year and 199 basis points sequentially.

This margin improvement was achieved despite employee costs rising to ₹895.30 crores in Q3 FY26 from ₹846.30 crores in Q3 FY25, suggesting better realisation from existing projects and improved operational leverage. The profit before tax (PBT) climbed to ₹265.00 crores, up 10.32% sequentially and 26.00% year-on-year. Tax expenses remained stable at 24.60% of PBT, resulting in the strong PAT margin of 13.97%, up from 12.82% in the previous quarter and 12.05% a year ago.

Operational Excellence: Capital Efficiency Remains Stellar

Zensar Technologies continues to demonstrate exceptional capital efficiency, a hallmark of quality IT services businesses. The company's return on capital employed (ROCE) stood at an impressive 31.74% in the latest reporting period, significantly above the five-year average of 27.67%. This metric underscores management's ability to generate substantial returns from the capital deployed in the business, reflecting efficient asset utilisation and strong pricing power.

Return on equity (ROE) remained healthy at 16.37%, slightly above the five-year average of 15.69%. Whilst this ROE places Zensar in the "good" category rather than "exceptional," it nonetheless reflects consistent profitability and reasonable shareholder value creation. The company's balance sheet remains fortress-like with zero long-term debt as of March 2025, making it a net cash company with negative net debt-to-equity of -0.44. This financial flexibility provides management with ample room to pursue growth investments, acquisitions, or return cash to shareholders without balance sheet constraints.

Working capital management showed some pressure in FY25 with changes in working capital consuming ₹55.00 crores compared to ₹48.00 crores in FY24, though this remains manageable given the company's robust operating cash flows. The company invested ₹472.00 crores in FY25, primarily in fixed assets and investments, whilst returning ₹264.00 crores to shareholders through dividends and buybacks, demonstrating a balanced capital allocation approach.

Demand Environment: Navigating Sector Headwinds with Resilience

The Indian IT services sector has faced persistent demand challenges through 2025, with clients across North America and Europe continuing to scrutinise discretionary technology spending amidst macroeconomic uncertainty. Large-cap peers have reported muted growth, with many struggling to achieve mid-single-digit revenue expansion. Against this backdrop, Zensar's 7.93% year-on-year revenue growth in Q3 FY26 appears relatively robust, suggesting the company is gaining market share or benefiting from specific client relationships and service offerings.

The sequential revenue growth of 0.66% in Q3 FY26, whilst positive, represents a deceleration from the 2.62% growth achieved in Q2 FY26 and 1.92% in Q1 FY26. This slowdown aligns with broader sector trends and suggests that the demand recovery remains gradual and uneven across verticals and geographies. The company's ability to expand margins during this period of tepid revenue growth indicates successful cost optimisation initiatives and potentially favourable project mix shifts towards higher-margin engagements.

Peer Comparison: Valuation Discount Amidst Mixed Fundamentals

Zensar Technologies trades at a significant valuation discount to several of its mid-cap IT services peers, with a price-to-earnings (P/E) ratio of 23.44 times trailing twelve-month earnings compared to the industry average of 27 times. This discount appears justified when examining relative fundamentals, particularly return on equity where Zensar's 15.69% lags behind peers such as Inventurus Knowledge Solutions (29.58%), Netweb Technologies (22.25%), and Tata Technologies (19.78%).

The price-to-book (P/BV) ratio of 3.84 times for Zensar is also considerably lower than peers like Netweb Technologies (30.87x), Inventurus (12.90x), and Tata Technologies (7.42x), suggesting the market assigns lower growth expectations or quality perception to Zensar's franchise. The company's dividend yield of 0.28% is modest, with the most recent dividend of ₹2.00 per share representing a payout ratio of 45.41%—indicating a balanced approach between rewarding shareholders and retaining capital for growth.

From a debt perspective, Zensar's negative debt-to-equity ratio of -0.44 positions it favourably as a net cash company, providing financial stability that matches or exceeds most peers. However, the relatively lower ROE suggests that despite this strong balance sheet, the company is not extracting as much profitability from shareholder equity as higher-quality peers, which partially explains the valuation discount.

Valuation Analysis: Fair Value with Limited Upside

At the current market price of ₹716.00, Zensar Technologies trades at a P/E multiple of 23.44 times, below the sector average of 27 times but above the broader market Nifty 50 multiple of approximately 20 times. The company's PEG ratio of 3.05 appears elevated, suggesting the stock is expensive relative to its five-year earnings growth trajectory. This metric raises concerns about the sustainability of current valuations, particularly if growth continues to decelerate or margins face pressure from wage inflation or competitive dynamics.

The stock has corrected 27.31% from its 52-week high of ₹985.00 reached earlier in 2025, currently trading closer to the lower end of its annual range with the 52-week low at ₹558.50. This correction reflects both company-specific concerns around decelerating revenue growth and broader sector weakness as IT services stocks have underperformed the market. The valuation grade has oscillated between "Fair" and "Expensive" through 2025, currently assessed as "Fair," suggesting the stock is reasonably priced at current levels but lacks a significant margin of safety.

Based on consensus estimates and historical valuation ranges, a fair value estimate for Zensar Technologies centres around ₹750-780 per share, implying modest upside of 5-9% from current levels. This limited upside potential, combined with execution risks and sector headwinds, makes the risk-reward proposition only marginally attractive for fresh investors at current prices.

Shareholding Pattern: Institutional Confidence Strengthening

The shareholding pattern reveals interesting dynamics with promoter holding remaining stable at 49.01% in December 2025, down marginally from 49.10% in December 2024. This minor reduction reflects minimal promoter dilution and demonstrates stable ownership by the RPG Group, which controls Zensar Technologies through various holding entities including Swallow Associates LLP (26.64%), Summit Securities Ltd. (11.01%), and Instant Holdings Ltd. (8.43%).

The most notable trend is the divergence between foreign and domestic institutional investors. Foreign institutional investors (FIIs) have been consistent sellers, reducing their stake from 14.98% in March 2025 to 11.80% in December 2025—a cumulative reduction of 318 basis points over three quarters. The sharpest decline came in Q3 FY26 with a 150 basis point reduction, suggesting foreign investors are taking profits or reallocating capital away from mid-cap IT stocks.

Conversely, domestic mutual funds have been aggressive accumulators, increasing their holding from 17.39% in March 2025 to 20.60% in December 2025—a gain of 321 basis points. This 105 basis point increase in Q3 FY26 alone signals growing conviction amongst domestic institutional investors, possibly driven by the strong margin performance and relative valuation comfort. The total institutional holding now stands at 34.92%, with 25 mutual fund schemes and 190 FII entities holding stakes, indicating broad-based institutional participation despite the recent FII selling pressure.

Stock Performance: Significant Underperformance Amidst Technical Weakness

Zensar Technologies has significantly underperformed both the broader market and its sector over the past year, with the stock declining 14.56% compared to a 7.50% gain in the Sensex—translating to negative alpha of 22.06 percentage points. This underperformance has been particularly acute over the past six months (-12.32% vs Sensex -0.57%) and three months (-10.55% vs Sensex -2.72%), reflecting sustained selling pressure and weakening investor sentiment.

The longer-term performance picture remains impressive, with the stock delivering 223.32% returns over three years and 197.10% over five years, vastly outperforming the Sensex gains of 34.98% and 68.29% respectively. This historical outperformance underscores the company's ability to create shareholder value over extended periods, though the recent correction suggests investors are increasingly focused on near-term growth concerns rather than historical achievements.

From a technical perspective, the stock is currently in a confirmed bearish trend that began on December 23, 2025, at ₹740. The stock trades below all key moving averages—5-day (₹712.16), 20-day (₹710.26), 50-day (₹722.82), 100-day (₹752.75), and 200-day (₹772.25)—indicating pervasive selling pressure across all timeframes. Technical indicators including MACD, Bollinger Bands, and KST are flashing bearish signals on weekly charts, whilst only the On-Balance Volume (OBV) indicator shows bullish divergence, suggesting accumulation by informed investors despite price weakness.

The stock's beta of 1.35 classifies it as a high-beta stock, meaning it tends to be more volatile than the broader market. This characteristic has worked against investors during the recent downturn, with the stock amplifying market weakness. The risk-adjusted return over the past year stands at -0.39 with volatility of 37.12%, placing Zensar in the "HIGH RISK LOW RETURN" category—an unfavourable combination that typically warrants caution from risk-averse investors.

Investment Thesis: Quality Business, Challenging Entry Point

Zensar Technologies presents a paradoxical investment case—a fundamentally sound business with good quality metrics trading at reasonable valuations, yet facing significant near-term headwinds that make timing critical. The company scores 47 out of 100 on proprietary investment scoring models, placing it in the "SELL" category, down from a "HOLD" rating as recently as October 2025. This downgrade reflects the confluence of technical weakness, decelerating revenue momentum, and sector-wide demand challenges.

The quality assessment remains "GOOD" based on long-term financial performance, with particular strengths including zero debt, strong ROCE of 31.74%, healthy interest coverage of 26.79 times, and no promoter pledging. The company's five-year EBIT growth of 15.43% demonstrates consistent operational improvement, whilst the average ROE of 15.69%, though not exceptional, reflects stable profitability. Institutional holdings of 34.92% and a consistent dividend track record further reinforce the quality credentials.

However, several factors constrain the investment appeal at current levels. The elevated PEG ratio of 3.05 suggests the stock is expensive relative to growth prospects, particularly concerning given the sequential deceleration in revenue growth rates. The bearish technical setup with the stock below all moving averages and negative momentum indicators suggests further downside risk before a meaningful bottom is established. The one-year underperformance of 22.06 percentage points versus the Sensex indicates the market is pricing in significant concerns about the company's growth trajectory.

Outlook: What Lies Ahead for Zensar Technologies

The outlook for Zensar Technologies over the next 12-18 months hinges critically on two factors: the sustainability of margin expansion and the timing of demand recovery in IT services. The Q3 FY26 results demonstrate management's ability to drive profitability through operational efficiency, but questions remain about whether 17%+ operating margins represent a new baseline or a cyclical peak that may face pressure from wage inflation, competitive dynamics, or adverse project mix changes.

The demand environment is expected to remain challenging through at least the first half of calendar year 2026, with most industry analysts projecting only gradual improvement in discretionary technology spending. Large global enterprises continue to prioritise cost optimisation over digital transformation investments, whilst smaller clients face budget constraints amidst economic uncertainty. For Zensar to sustain revenue growth above 7-8% annually, the company will need to either gain market share from competitors or benefit from specific vertical or service line strengths that offset broader sector weakness.

From a valuation perspective, the current price of ₹716 offers limited margin of safety with fair value estimated at ₹750-780, implying only 5-9% upside. For investors seeking attractive risk-reward, a more compelling entry point would emerge on further weakness towards ₹650-680 levels, which would provide a 15-20% margin of safety and better long-term return potential. Conversely, existing holders might consider reducing positions on any rally towards ₹750-770, particularly if accompanied by deteriorating revenue trends or margin pressure.