Traditional IT Demand Will Erode Revenues Amid AI Transition

Key Takeaways

• Swift industry shift to AI, automation, and tightening data rules threaten core revenue streams and market reach, challenging long-term growth and stability.
  
• Reliance on large clients, rising costs, and intensified competition increase revenue, margin, and earnings risks while limiting differentiation and pricing power.
  
• Proactive AI adoption, operational efficiencies, diversified client base, and a strong financial position position Zensar Technologies for sustained revenue growth and competitive resilience.

Catalysts

A digital solutions and technology services company, provides information technology (IT) services and solutions in the United States, Europe, Africa, India, and internationally.

• The rapid adoption of generative AI and automation is expected to significantly reduce global demand for traditional IT services, undermining Zensar's core revenue streams and restricting long-term revenue growth even as the company claims AI capability building, as enterprises increasingly turn to self-serve or SaaS-based solutions.
  
• Increasing digital sovereignty and stringent data localization requirements in large markets like the US and EU are likely to impede cross-border outsourcing, shrinking Zensar's addressable international market and adding persistent pressure on top-line growth and client acquisition.
  
• Client concentration risk remains elevated, with top accounts driving a disproportionate share of revenue and the management confirming about 10% exposure to a single client; if a few large customers reduce spending or switch providers, revenue volatility and the risk of earnings decline will worsen.
  
• Zensar's heavy investment in employee salary hikes, ESOP implementation, and ongoing cost increases (approximately $3 million next quarter) will exert downward pressure on net margins, especially as margin recovery is subject to delayed price realization and uncertain demand.
  
• Growing commoditization and intensifying competition from global IT services giants and digital-first mid-tier players will drive further margin compression for Zensar, limiting its ability to differentiate services, sustain pricing power, and maintain stable earnings over the long term.

Zensar Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Zensar Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Zensar Technologies's revenue will grow by 7.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.3% today to 13.7% in 3 years time.
• The bearish analysts expect earnings to reach ₹9.0 billion (and earnings per share of ₹39.67) by about July 2028, up from ₹6.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, down from 28.4x today. This future PE is lower than the current PE for the IN IT industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.42%, as per the Simply Wall St company report.

Zensar Technologies Future Earnings Per Share Growth

Risks

• Zensar Technologies is demonstrating strong long-term adaptation to digital and AI-driven transformation, as evidenced by the launch of its GenAI accelerator platform, a high percentage of AI-infused deals in the pipeline, and proactive capability building for AI across its workforce, which is likely to support revenue growth and future competitiveness.
  
• The company's order book is healthy and has grown year-over-year with longer average deal tenures and increasing complexity, indicating improved revenue visibility and the potential for steadier future earnings.
  
• Broad-based growth across client accounts, with an increase in the number of million-dollar-plus accounts and more diversified vertical exposure, reduces client concentration risk and supports more predictable revenue streams over the long term.
  
• Operational improvements such as low attrition rates, improved utilization, and successful cost optimization through automation and offshore delivery are likely to support stable or improving net margins going forward.
  
• A strong cash position and prudent capital allocation strategy, including openness to investing in acquisitions and large deal creation, gives Zensar strategic flexibility to pursue future growth avenues and supports long-term earnings potential.

Valuation

• The assumed bearish price target for Zensar Technologies is ₹604.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Zensar Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1130.0, and the most bearish reporting a price target of just ₹604.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹65.6 billion, earnings will come to ₹9.0 billion, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 15.4%.
  
• Given the current share price of ₹812.25, the bearish analyst price target of ₹604.0 is 34.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.