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Zensar Technologies Ltd
Earnings Call Analysis
Q2-2024 Analysis
Zensar Technologies Ltd
Despite the challenging economic landscape, Zensar Technologies achieved a modest revenue boost, crossing $150 million with a quarter-on-quarter growth of 0.6%. Impressively, profitability as measured by Profit After Tax (PAT) saw a significant uplift, climbing by 130 basis points sequentially and a noteworthy 940 basis points on a year-over-year basis.
Drilling down into the individual sectors, the results were mixed. The Banking and Financial Services vertical experienced a growth of 3%, and the Manufacturing and Consumer Services sector expanded by 6.7%. However, these gains were counterbalanced by a decline of 8.3% in the Hitech sector and a slight retreat of 1.7% in Healthcare and Life Sciences.
Efforts to retain talent seem to be paying off, with the company reporting a decrease in attrition over the last 12 months to 13.1%, a significant sequential improvement of 280 basis points. A contributing factor to this progress may be the salary hikes administered during the quarter, which were commended for surpassing industry averages.
Despite growth in other areas, the company saw a compression in its gross margin, which decreased by 180 basis points quarter-on-quarter to stand at 31.8%.
Sales, general and administrative expenses (SG&A) saw an improvement of 170 basis points despite a 30 basis point impact from wage increases. EBITDA margin for the quarter was stable at 18.6%, with the management remaining committed to maintaining mid-teens margin trajectory for the financial year.
The order book for the current quarter was solid at $194.8 million, comprising some continued engagements from previous quarters and other renewals. Tax efficiency also improved, with the effective tax rate dropping to 22.7% for the quarter.
The company reported robust growth in several key service areas—with advances in engineering and experiences services—and emphasized its ongoing efforts to develop technological assets and enhance employee expertise, especially in emerging domains.
Despite the acknowledgment of macroeconomic challenges dimming tech spending outlooks, Zensar Technologies is maintaining a vigilant stance, ready to adapt its approach and investment plans to meet client demands. The company's overarching focus on client satisfaction, operational excellence, and nurturing a supportive culture for employees has yielded positive outcomes over the past year.
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Ladies and gentlemen, good day, and welcome to Q2 FY'24 Earnings Conference Call of Zensar Technologies Limited hosted by Motilal Oswal Financial Services Ltd. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Pritesh Thakkar from Motilal Oswal Financial Services Ltd. Thank you, and over to you, sir.
[indiscernible] everyone. On behalf of Motilal Oswal, I welcome you all to Zensar's Q2 FY '24 Earnings Call. We have with us Mr. Manish Tandon, CEO and Managing Director of Zensar Tech; Mr. Sachin Zute, 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 of the second slide of the earnings presentation is assumed to be read and understood.
Thank you, and over to you, sir.
Thank you, Pritesh. Hello, good morning, good afternoon and good evening, everyone. Thank you for taking the time to join us today to discuss Zensar's financial results for the second quarter of financial year '24.
With me on this call are a few distinguished colleagues: Vijayasimha, our Chief Operating Officer, Sachin Zute, Chief Financial Officer; and Mr. Vivek Ranjan, Chief -- CHR.
Our Q2 performance shows continued strength and demand for our service lines, particularly around experience services, advanced engineering, data engineering and analytics. Q2 revenue crossed $150 million, a sequential quarter-on-quarter growth of 0.6%. Our PAT registered a sequential quarter-on-quarter growth of 130 basis points and year-over-year growth of 940 basis points. Earnings per share saw a growth of 11.3% quarter-on-quarter.
Let me walk you through the high-level performance of our geographies and verticals for this quarter. The Europe and South Africa region has shown good growth momentum on account of our service line diversification and new wins across long-standing and new clients. We saw a decline in U.S. region due to project closures in a few key customers.
On the vertical front, I would also like to take this opportunity to update that we will start tracking Healthcare and Life Sciences as a separate vertical. In the last 4 quarters, we have identified certain key strength areas, health care being one of them. We see a long-term potential in health care and have already identified leadership around it.
It is an existing business for us, and we have realigned our verticals to that effect. Apart from this, we have also realigned our other verticals in line with our leadership structure. Coming to the sequential Q-o-Q constant currency growth for the verticals, our services revenue in Banking and Financial Services grew by 3%, Manufacturing and Consumer Services grew by 6.7%, while Hitech declined by 8.3% and Healthcare and Life Sciences saw a decline of 1.7%.
I am pleased to share that for the second quarter, our last 12 months attrition declined to 13.1%, a sequential improvement of 280 basis points. This quarter, we gave salary increases, which were better than the industry average and has been very well received by our associates across all levels.
With that, I will now invite Sachin Zute, our Chief Financial Officer, to provide an update on some critical financial date.
Thank you, Manish. Good day, everyone, and thank you for joining the call today. In addition to Manish talking about business, I will take you through some of the key financial metrics for the quarter ending September '23.
The revenue for the second quarter of FY '24 stood at $150.2 million in U.S. dollar terms, reflecting growth of 0.6% sequentially in reported terms and 0.2% in constant currency terms. Gross margin for the quarter stood at 31.8%, decrease 180 basis points quarter on quarter. Decline was primarily due to wage hike impact of 190 basis points, reversal of onetime benefit of 80 basis points, which was mentioned in last quarter's earnings call. It was partially offset by the exchange gain of 30 basis points and utilization benefit of 50 basis points.
SG&A has improved by 170 basis points. It had impact of 30 basis points -- sorry. Wage hike had impact of 30 basis points on SG&A, which was compensated for reduction in discretionary spend. Further, during the quarter, we had finalized our annual management bonus of FY '23 which had a onetime positive impact of 160 basis points on SG&A. Normal SG&A has remained flat quarter-on- quarter basis.
EBITDA for the quarter was at 18.6%, lower by 10 basis points against last quarter. Net of onetimer, EBITDA would have been close to 17%.
After Q2 of last fiscal, we have consistently improved our EBITDA margins. This was a result of rigorous efforts driven across the organization, which involved several tracks, including improving commercial, focus on services revenue, optimization of subcon, improving utilization, control on attrition, reducing talent acquisition costs, resulting in a Y-o-Y improvement of approximately 10 percentage points on EBITDA. These measures have enabled us to make investments into focus areas of business.
Our objective continues to maintain margins at mid-teens trajectory for the financial year despite current demand softness.
LTM attrition levels have shown continuous improvements over the quarters and stood at 13.1% for Q2 FY'24.
DSO for the quarter stood at 79 days.
For the quarter ended, cash and cash equivalents, including investments, stood at $227.1 million, $6.7 million decrease from last quarter. Quarter-on-quarter decline is due to advanced payments, dividend payout and annual bonus payout of FY'23 in Q2 FY'24.
Order book was $194.8 million for the current quarter. This also includes some spillover from previous quarters and certain renewals, which closed earlier in this quarter itself.
Effective tax rate for the quarter is 22.7%, an improvement of 300 basis points quarter-on-quarter. ETR improved due to credit received at foreign locations during the quarter, part of which are expected to continue for balance of the year.
Total amount of outstanding hedges as on September 30, 2023, was equivalent to $289.1 million against $246.7 million in Q2 FY'24.
On ESG front, as of Q2 FY'24, we are setting specific initiatives to increase green energy component and reduce energy consumption to achieve our goal to reduce greenhouse gas emission by 11% compared to FY'23. We have achieved approximately 25% green energy component in our energy mix globally. We continue our journey on water positivity with water generation exceeding water consumption at our Pune campus.
With that, I now invite Vijayasimha, our Chief Operating Officer, to provide updates on business operations.
Thank you, Manish and Sachin. Greetings, everybody. Manish has provided insights about our business and Sachin has shared details about the key financial metrics. I will share details about our operational efficacy, service line performance and capability enrichment initiatives.
We are continuing our journey on operational excellence and making good progress on key imperatives like pyramid optimization, managing utilization in an optimal range and calibrated usage of subcontractors while managing our on-site mix. Disciplined execution on these parameters enabled us to minimize the impact of wage increase on cost of delivery. Enhancement -- enhanced fulfillment trigger enabled us to minimize the impact of volatile demands due to macroeconomic situation. This rigor enabled us to improve our utilization by 60 basis points.
This quarter, we saw a good growth in many of our service lines. On a quarter-on-quarter basis in reported terms, our advanced engineering service line registered a growth of 7.8%, experience services grew by 3.1%, application services and enterprise application services grew by 0.2% while foundation services remained flat. Data engineering and analytics saw a decline.
Our key service lines continued to scale up well, making up to 34% of our total revenues. We are continuing to deliver value to clients via our Experienced-Engineering-Engagement continuum of service offerings. As part of this, we have developed multiple assets that can help our clients navigate the complex AI ecosystem. These assets help our clients identify the right set of use cases and technology solutions to achieve competitive differentiation.
We are accelerating our talent transformation journey to increase the depth and breadth of subject matter expertise of our employees on emerging technologies as well as appropriate business domains.
With that, I now hand it back to Manish.
Thanks, Vijay. There are signs of continued softness due to difficult macroeconomic environment, impacting customer technology spend decisions. We are carefully watching the demand environment and continue to stay close to our clients so as to respond to their needs and accordingly adapt our investment plans.
Over the last 4 quarters, our thrust on client-centricity, execution excellence and employee-centric policies have yielded positive results. Continued focus on execution of strategy through accelerated go-to-market partnerships and sales rigor with the goal of investing in long-term growth remains our top priority.
With that, we can open the lines for questions.
[Operator Instructions] The first question is from the line of Mr. Nitin Padmanabhan from Investec.
So I had a couple of questions on the deal wins. So I think on the face of it, the deal wins look strong at a 1.3x book-to-bill. Normally, I would assume that this would lead to a strong Q4, but I think you made a few qualifications there saying there's spillover and the renewals. Could you give some color there? And assuming a strong Q4 with these deals come flowing through into Q4 revenue, is that a wrong assumption? So just wanted your thoughts on how to think about this.
Nitin, as I said, that $194.8 million order book, which we reported had spillover from Q1. There are certain deals, which got spilled over from Q1 to Q2. And there are a couple of deals which we were expecting to sign in Q3 got signed in Q2 itself. So normalized run rate could be very close to what we reported last quarter. It will be better than last quarter.
Now as far as Q4 is concerned, Nitin, I think it's too early for us to give you any flavor given the circumstances, which we are dealing with. And as Manish specifically called out, the demand environment continues to be challenging. And I think we will be only able to comment on that as we move forward.
Right. So here's the challenge. So the broad thought process was that margins will improve and you have done extremely well on margins and growth should be tail ended. And at least on the face of it, it looks like based on the deal wins that it could be.
Now what are the concerns that you have? Now I did notice that Hitech is down sharply and maybe Q3 is soft because of furloughs. So just wanted your thoughts to how to think about this. Do you think that these deal wins will not convert to revenue? Or there are possibilities of delayed convert to revenue?
No. I think the way we report order book, the deal wins will convert at the -- entire $194.8 million is going to convert to revenues. The question is that you are filling the bucket from one end, but we don't know what will be the leakage of revenues due to furloughs and due to lower number of working days and so on and so forth in the quarter.
So you can be assured that if we are showing $194.8 million, one, it's a very precise number; and two, we will get those numbers.
Fair enough. And lastly, before I cede the floor, what are the areas of worry from a vertical standpoint at this point in time? And when do you think Hitech can potentially bottom out?
I think if you look at our performance overall, except for Hitech as a vertical, we have done very well, actually. We have done well in Africa. We have done well in U.K. and Europe. We have done well in financial services. We have done well in consumer services. Our Experienced Services business is growing, horizontals we have seen growth pretty much everywhere. So except for Hitech as a vertical, the growth has been very, very promising across the board.
But when will Hitech recover? I think that's a trillion dollar question, not even a billion dollar question. Because as you know, today, 70% of the capital spend in the U.S. economy is on technology and technology-related products. And as we are seeing elevated interest rates and quantitative tightening, I personally feel that we will see -- unless we see a dampening of interest rates and dampening of quantitative tightening, I don't think it will be easy for the Hitech industry -- Hitech as a vertical will turn around.
[Operator Instructions] The next question is from the line of Sandeep Shah from Equirus Securities.
Sir, just wanted to know within the Hitech vertical, is it staying within one top client? Or these are staying beyond top clients in some of the other top clients within Hitech? And the way I look at is these clients are a pain points for Zensar in terms of suppressing growth on a year-over-year basis.
So we can have two solutions. One is to open more purchasing window in these accounts or actually accelerate the growth in the other segments outside these accounts. So this part, we are looking in terms of diversifying and minimizing this risk, which suppress the growth of Zensar year after year. And then I have a follow-up, which I will ask.
Sir, I'm not as pessimistic about Hitech as you are. I think once we get our act together in this vertical, it will turn around. That's number one. Number two, as you've seen, we've added health care as we have identified Healthcare and Life Sciences as a vertical and which we are going to put special focus on. You can also -- we also opened 8 new logos in this quarter.
So there is a lot of action happening on the sales side. And actually, that is reflecting in the order book of $194.8 million that Sachin talked about.
Perfect, perfect. And just in terms of the [ lead-generated ] go-to-market accelerated sales growth aggression, Manish, is it fair to assume the roadmap in terms of quarterly TCV is on the up rather than remaining more or less at the same range of $150 million, $170 million on an adjusted basis?
I think as I mentioned in the previous answer, it will depend on -- well, you have seen the order book number. I think it will depend on what we see in terms of revenue leakage because of furloughs or specific client situations are the main things. So it's just dependent on back. It's an act that we need to -- it's a balancing act that we have to do every quarter. And as you know, this quarter is -- Q3 is a very, very tough quarter for the entire industry because of furloughs and lower number of working days.
Okay, okay. And second, just Sachin, a question about first half normalized EBITDA margin even if I report the one-off in the second quarter, it looks like at 17.8%. And the wage hike is largely behind and we are still maintaining a mid-teen kind of a guidance. So is it fair to assume the margin guidance is slightly more conservative? Or do you see some unforeseen headwinds may be related to furloughs in the coming quarters?
So Sandeep, furloughs is a very much known phenomenon for the industry and for us as well. So from that perspective, the guidance which we provided for the year actually baked that in. Apart from that, as Manish said, we have now created room for creating investments in our capability building, in our sales and marketing departments. So from that perspective, the investments will definitely have some dilution from the current level.
Just to reiterate on PAT, I don't know how many of you noticed that in the first half of this year, we made more than the entire -- what we did in the entire last FY'23. So at least that's something that we internally are very proud of.
[Operator Instructions] The next question is from the line of Mihir Manohar from Carnelian Asset Advisor.
You mentioned the mentioned 17% versus the reported number of 18.6%. So what is the gap here, which is there? And what exactly is this?
So the gap is due to the onetime reversal of management bonuses for FY'23, which the decision was taken during the current quarter and reversal of that has come in the current quarter's P&L. As we all know that FY'23 was not a very good year for us as a company and we have a very high performance-driven criteria on the basis of which management of the company gets its bonuses. Given the performance, we have seen the onetime positive impact of 160 basis points on the margin. So if you take that out, the normalized margin would be close to 17%.
The next question is from [ NGN Puranik ] from Enam Asset Management.
Manish, a great quarter in tough times. I have a question about -- you talked about capability building and perimeter rationalization. And these are the best leverage available for an IT services company. So if you can elaborate on what all you are doing on the capability building vertical, horizontal capability building?
I'll request -- yes, [ Mr. Puranik ], I will request Vijay to address this question. He's been doing a tremendous job in managing the perimeter and...
Yes. So on the capability building front, we have basically 2 dimensions. One is deepening the technology capabilities of our associates around the 5 service lines that's associated with advanced engineering practices, which is nothing but cloud-native capabilities. We are also significantly increasing the capability of our associates around the experience services as well as Oracle SAP Salesforce kind of a thing.
Outside of that, we see a strong market for AI and gen AI. So as we speak, we have embarked on the journey of upskilling our people across the AI/gen AI spectrum. So that is completely fully enforced.
And finally, given our growth potential, we see that -- we also need to like basically have our people sharpen their domain skills because techno-functional skills are what is going to be the need of hour to deliver value to our clients. So we are sharpening the domain skills as well. And of course, the other things associated with leadership training, project management training and things like that.
So we have a very structured capability enrichment program with individualized learning path for each of our associates and that is beginning to yield results, some more work to be done.
Can you summarize in terms of the capability of building, which will use it for planned operations? So what are the key services you're building capability? Is it -- how big is the focus on analytics? You talked about customer experience and the engagement and others. But in terms of analytics, how big is the focus?
I think there's a huge, huge amount of openness, [ Mr. Puranik ] on experience services. This includes both the design research, design UI and customer experience. We have a very compelling practice on data engineering and analytics already.
And by the way, we have integrated the generative AI capability with our data engineering and analytics capabilities because we believe that it is without data, there is no artificial intelligence. It can only be artificial dumbness.
So we have combined the two and we believe that all these new service lines are going to be big growth areas for us, and we are actually seeing those in the results.
And how many projects you have done using analytics with generative AI?
There are -- nobody has done any projects. And if they claim that they have done projects, it may be a single-digit number. But we have done close to 100 proof-of-concepts for our clients. And not every proof-of-concept translates into real projects because the technology is still fairly nascent, no matter what people tell you. It is fairly nascent. It is not really ready for prime time on the enterprise, especially on the customer side.
So it can be both productive and predictive?
Yes.
From productive -- from perspective of improving your own operations and predictive in terms of building solutions with the client?
Yes. And most of the use cases that we are seeing the clients use it for, it is more on the productive side rather than predictive side because on your inside stuff you can afford a higher error rate than on the client-facing stuff. So most of the use cases that we are doing with POCs on with our clients and for ourselves actually are related more to productivity improvement rather than predictive capability.
Productivity improvement. And so when you say you're building capability at a different level, so how do you leverage this? How do you -- is it -- is using fixed price one option because fixed price projects are very difficult to manage because they go wrong on estimation, either time, cost, effort, value, anywhere or scope mainly. So but when you have people who have better experience capability, can you take a bigger risk of doing fixed price projects where the margins can be greater?
Actually, there are two ways of using this concept. One is, as we found out with a certain set of clients that -- certain clients that they didn't have the budget to do an all natural intelligence project. By reducing artificial intelligence and improving the productivity in a low-risk fashion, we were able to reduce their overall spend by 50%. And then they had the budget to do the overall project. So that is one way of doing it.
Fixed price, we are doing -- we don't see the -- technology is so new that we don't really want to take high-risk fixed-price projects. But proof-of-concepts, demos, et cetera, we are doing it on a fixed price basis and it's not very risky.
Sorry, [ Mr. Puranik ]. So the next question we have is from Mr. Pritesh Thakkar.
Just had a question on the wage hike for this quarter, you indicated on the SG&A part the impact of 30 bps. So is there any incremental [ SG&A ] impact that we expect in Q3 as well?
Actually, Pritesh, your voice is not very clear, but I'm assuming that you are asking me that whether the onetimers will have an impact on Q3? If that's the question, then I have clearly called out that the current...
So what I was asking on the SG&A, you mentioned that the impact on wage hike was 30 bps in this quarter. So are we expecting any residual impact for the next number or...
No, nothing. Nothing apart from what I called out.
And on the client bucket, what is driving growth for beyond top 20 clients because it reported the 9.5% Q-on-Q growth while the top 20 clients declined by 4.9% Q-o-Q. So what's included there?
What's the question again, Pritesh?
Pritesh, are you using a mic or pick up one. Can you please speak into the phone? Your voice has not been clear right from the beginning.
Yes, is it audible now?
Slightly better.
Yes. So I was asking on the client buckets, like what is driving growth for the beyond top 20 clients? Because it reported 9.5% Q-on-Q growth while your top 20 accounts declined 4.9% Q-on-Q.
Pritesh, if you look at when Manish joined at that point of time, he clearly called out that we are going to start a new organization within our sales team, which will focus on the net new business for the company. And for last 2 quarters, there have been a lot of hiring, which is happening over there. And gradually, we definitely think that, that engine will start picking up and will help us grow outside top 20 clients for the company.
And you are already seeing that, Pritesh, the non-top 20 clients are growing faster and this is primarily because of two things. One is net new logos. And the second is that in our smaller clients, we are doing much better on farming and hence trying to increase the numbers.
Okay. Understood. On the Q3 quarter, I mean, since we have these furloughs and holidays coming in, do we expect the impact to be on a similar line to what we had last year? Or are you expecting growth -- I mean the growth to be a little [indiscernible] given that we have this macro event coming in?
So because normally, we don't give forward-looking guidance on this subject. But what I can say is that it will be in line with these last 2, 3 quarters in past 3 years -- 2, 3 years, sorry, 2, 3 years impact which you saw.
Understood. No, the reason why I'm asking is because we signed, I mean, strong [indiscernible] this quarter. So I thought if there is any ramp-up coming in from there and we should see a little bump up in Q3, vis-a-vis the last quarters.
No, I think the furloughs are part of the industry and part of the numbers, which we have been reporting over the year. And we do feel that we will see the impact of furloughs for Q3. Along with that, if you see the macro environment is also definitely not helping us. So from that perspective, you can actually take the impact, which you saw over the last 2, 3 years in Q3 on the similar lines we are expecting given current situation.
The next question is from the line of Mr. Sameer Dosani from ICICI Prudential AMC.
Congrats on focused execution during the quarter in difficult times. On health care, if you can share some strategy. I'm sure you have formed the GTM strategy leadership you have conducted. So if you can share some pointers of what is your thought process and that will be helpful.
The second part is in BFSI, right? So in times like these where expense from banks have been very -- are struggling actually, your growth has remained robust. So what are those parameters or what are those things that you're doing differently. If you can just highlight what are the key differentiators there.
So I think, first of all, on health care, we already on Healthcare and Life Sciences I will reiterate. I think we have -- without even calling it a vertical, we have had a good presence in life sciences and MedTech overall and a couple of health care accounts. We believe that adding domain capabilities to this mix and offering a broader range of our services to the health care sector, Healthcare and Life Sciences sector, will yield richer dividends than it was if it was hidden in the emerging area.
So we will start by enhancing our domain capabilities in this area and marrying our offerings with the domain capabilities and take them to the market. That is broadly the incubation strategy, at least for the first 2, 3 quarters.
BFSI, we are doing quite well. I think -- two reasons. One is in BFSI, especially on the insurance side, we have specialized in certain packages and we have the -- both the technical depth and the domain capabilities to go deeper into these areas. And once we have entered with this, we have expanded using our other offerings. So that has worked well in overall BFSI for us.
Understood, understood. And for health care, you would have already invested leadership, et cetera, that process is behind us. That's how we should think of.
Yes. I think, again, as you know, I myself have a lot of experience in health care and life sciences. So I will incubate the leadership there. And yes, we have hired someone who can -- who brings the requisite talent from both the domain and sales perspective.
The next question is from the line of Sandeep Shah from Equirus Securities.
Just, Sachin, wanted to understand, there is a dramatic improvement in the offshore revenue mix over the last several quarters. Even in this quarter, there has been higher -- improvement. So is it fair to say in the last few quarters, the volume growth is much higher than the reported U.S. dollar revenue growth?
And a follow-up question in terms of gross margin tailwinds. Utilization is higher. Offshore revenue mix is higher. So are we still foreseeing some further headroom spending in these 2, 3 levers which can impact the gross margin? I do agree investment may impact the SG&A, not at the direct cost level much.
And the third is, what is the reason for absolute decline in depreciation and amortization? And whether the 2Q level is a normalized level of depreciation or amortization. Hello?
Ladies and gentlemen, we have lost the management connection. Please stay connected while we reconnect them.
[Technical Difficulty]
Thank you for patiently holding, we have the management team back on the call.
Yes. Am I audible? Should I repeat the question?
Yes, Sandeep, I have your question. Earlier, when we used to have product revenues as part of our portfolio, they used to get counted as part of on-site. Now with our focused efforts on services revenue as part of our revenue mix has changed over last 2 quarters and that is also what is getting reflected in the offshoring numbers, which are getting reported.
Okay, okay. And I had a follow-up, which I asked earlier itself, it may not be audible to you. Is there further headroom in the offshore revenue utilization rate increase going forward? And what is the reason for absolute decline in depreciation and amortization, whether Q2 level will be sustained or there is one-off and it may increase from Q3?
So let me answer the first question -- second question, then I will hand it over to Vijay to answer your first question. As far as depreciation is concerned, the acquisitions, which we have done over the years, the amortization of that is impacting -- the amortization has been coming down over last few quarters and that is what is getting impacted. Going forward, we believe that we will be in this range what we reported in Q2.
To your question about offshore distribution as well as utilization, I think we are now seeing that the offshore ratio is at a fairly stable level for our optimal level. So we don't expect significant movement from these levels. Utilization is also fairly optimal. It will be range bound depending upon the sensitivities associated with certain quarterly phenomena. Otherwise, I think we will operate in the current utilization range.
The next question is from Devang Bhatt from IDBI Capital.
So last time you had -- you did that you will not target large deals, still margins are stabilized. So now that margins have reached comfortable levels, are you targeting any large deals and in which area are you seeing traction? Is there any large deals in the pipeline? And if yes, if you could elaborate the nature of that.
Actually, let me sort of start by defining what large deals are for a company of our size. And anything with $5 million ACV or $25 million TCV is what we consider as a large deal.
By that definition, we are working on a few deals. I cannot quantify the deals just now, but I can tell you that at least 4 or 5 deals we are working on. You know that the win rates on these large deals and the competitive intensity is very high. So we are not really projecting anything from these deals just yet.
But to answer your question, yes, we are in the market for large deals. And I can also tell you that wherever we have gone in, we have been received well. We may not have won the deal, but we have been received very well.
So are we seeing cost efficiency kind of a deal or a digital transformation kind of a large deal?
We are not seeing digital transformation kind of large deals, that is for sure. We are seeing large deals more in the cost takeout space.
Okay. And sir, you had said that the company's growth, 95% comes from farming. So in Hitech, what are you doing to drive that growth in mining the clients in Hitech?
Well, I think in Hitech, we are trying to change our sales force and enable them to be much more proactive, number one. Number two, we are trying to build higher-level relationships with our clients, build great relationships. And number three is our messaging and our work in the Experience to Engineering to Engagement continuum is resonating very, very well with our clients. I mean you will be surprised to know that in the Hitech space, we actually work with some of the top clients in the industry.
Okay. And sir, just last question. European region did very well, but which verticals drove that growth?
It was both Banking and Financial Services and Manufacturing and Consumer Services, MCS. Both of them did well for us.
The next question is from the line of Chirag Shah from White Pine.
Yes. So my first question is you mentioned in the opening remarks that data engineering and analytics have seen a decline. But can you indicate why it is and how will you look at it from 12 to 18 months [indiscernible]?
That is because data engineering and analytics was concentrated more in the Hitech vertical. And since the high-tech vertical declined, there was a corresponding effect on digital, on data engineering and analytics vertical.
So this is more industry-driven rather than application-driven or line [indiscernible] driven. Fair point. That is the right understanding, correct?
Yes.
Okay. Sir, second question is on the margin spend. So your annual analyst meet you also indicated your aspiration is hitting margin and stability in margins in a particular band. Now since 2 quarters, you are there, if I do H1, you are almost there. And also your aspiration to reinvest in the business to build up capabilities, maybe at a slightly faster pace than what your peers may be doing.
So how should one look at margins from here on? Is there a case of reset on the higher side? Or is there a case of being slightly cautious? Or these are normalized margins and if it activity picks up, that would be significant uptick [ advantage ]?
So we want to keep -- as I said, first of all, we want to bring predictability in our margin, create a trajectory in our margin. In last 4 to 5 -- in the last 3 to 4 quarters, we have been able to work structurally towards that. Now as you know, though currently, industry is going through a tough time, but as the growth returns, we want to ensure that Zensar is ready to take advantage of that growth from the technology perspective as well as from the sales perspective.
So we have already started investing in building up our sales force. That's the reason I specifically called out that on a quarter-on-quarter basis, normalized SG&A has remained flat. And we -- with this kind of margin, we are creating headroom for us to further invest into business into the area in which we see if it needed to be invested.
So from that perspective, I think our goal will be continue to be in the range of mid-teens margin. Anything over and above that, in some or other ways, we want to invest back into the business and be ready for the growth when industry turns around.
So if I then rephrase or re-summarize, current margins that we have seen in H1 are kind of normalized margin unless for a negative shock that comes across in the business? That is the right way to look at it?
18.6% is not mid-teens. It's almost double.
No. I am saying excluding that 150 bps and looking at H1, excluding that 150 bps of reversal, [ reverting ] actually pertains to last year right?
So these are the headroom which we have created for ourselves, which we want to invest back. So normalized margin, which we, as management team is targeting is midteen, which is between 14% to 16%. Anything over and above that will be reinvested in some or other form back into the business.
Due to time constraints, the next question is from the line of Nitin Padmanabhan from Investec.
Just a quick bookkeeping one. What is the proportion of net new in the total TCV...
So on overall basis, my [ EE ] is 2/3 of my book and 1/3 of my book is EN [ and my NN. And my NN ] Is in low single digits right now, Nitin.
$2.5 million.
So the next question is from the line of Dipesh from Emkay Global.
Just want to understand about the reinvestment and the margin trajectory. Typically, right now, let's say, we are at 17% adjusted EBITDA margin and 14% to 16% is the range what we indicated. Usually, what time period is required for you to optimally operate between that 14% to 16% range because investment will take some time. But considering next 2, 3 quarters -- so typically, how long it will take for you to start operating within the targeted range?
See, if you look at our hiring process on the leadership is already on and Manish already said that we have already onboarded our health care leaders as well. And there are a couple of other hirings, which are happening in the company. So from that perspective, the process is already going on and we will see the impact of that in Q3 and Q4.
So broadly by year-end, we should operate within the optimal range of 14% to 16%, where focus would be on accelerating revenue growth. Is it right understanding?
See, apart from that, we also have to see, [ as Manish already said ], we will also need some investment in case we win any large deal or something like that, correct? And as you know, that large deal initially at least first few quarters are not a margin-accretive deal. So if something comes our way, we want to ensure that we are ready for that.
Understood. And last question is about client and client mining related thing. Let's say we are roughly around 47-odd clients giving more than $5 million kind of revenue. On top 20, we are seeing some weakness. And I think, obviously, we always maintain the client mining is the long-term kind of growth potential, really those things.
So just trying to understand if you can give something in last 2, 3 quarters, the new client which we added, the quality of those clients compared to -- obviously, we are seeing some challenges in top 20 and there might be some mix change. If you can provide some qualitative aspect in terms of the kind of clients which we are adding?
So we are going after our target account-listed companies greater than $2 billion in revenues. And mostly, we are adding -- the effort in adding clients is going towards those clients only. I mean, sometimes things -- smaller clients come to us with a larger project. We're happy to take them. But our focus is always on companies with revenues greater than $2 billion. That's number one.
Number two, I think if you look at the order book, I think we -- the EN portion, existing new portion, is pretty strong over the last couple of quarters, which means that the farming engine is working. And farming engine is not only working, but it's working on cross sales, so to say. So those are the 2 data points that I would like to share.
Our next question is from the line of [ Jalaj ] from Swan Investments.
I just want to see this is with regards to your last commitment in [indiscernible]. So sir, what would it take to reach quadrant one of the -- in terms of the growth performance because that is what you had -- that is our target. So in effect of this, what is lacking right now and what sort of investments [indiscernible].
And secondly, is the sales and support team, same team right now in place or there are some major [indiscernible] still required there?
Can you come off the speaker phone and then ask the question? There was a lot of echo from your line.
Sure. Is it better now?
Yes, a little better. Go ahead.
Sorry. So this is -- first question is with regards to the last discussion in the analyst meet, which was around our target to reach to a quadrant 1 in terms of the performance growth-wise. So what would it take us to be there, that is what the -- where we want to be there. So that's one thing.
And secondly, is the sales and sales support team right now in place? Or there is still some more head count to be added there because I do see that there is a certain attrition there also. So these two questions.
Yes. So top quadrant remains our goal. And as I said, we will not reach that goal in 1 quarter or 1 year. So what I think we are targeting is that we'll move up a quadrant every year, so to say. Currently, we are in the bottom. That is number one.
And the second thing is on sales. As far as head count is concerned, I think we are there. As far as quality is concerned, the jury is still out there and we continue to look at sales performance at an individual level and counsel people who are not performing. And we'll continue to do that.
Thank you very much. As that was last question for today, I would now like to hand the conference over to Mr. Manish Tandon for closeout -- closing comments. Thank you.
Thank you. Thank you very much for spending time this evening with us. We hope we answered all your questions. If there are more questions, we have a wonderful Investor Relations team. You can address your questions to them. Thank you very much.
Thank you so much, sir. On behalf of Motilal Oswal Financial Services Ltd., that concludes this conference. Thanks for joining us, and you may now disconnect your lines. Thank you, everybody.