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Edited Transcript of ZENSARTECH.NSE earnings conference call or presentation 7-Aug-19 10:30am GMT

Q1 2020 Zensar Technologies Ltd Earnings Call

Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Zensar Technologies Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay Bhandari

Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer

* Harjott Atrii

Zensar Technologies Limited - Executive VP and Head of Cloud & Infrastructure Services

* Navneet Khandelwal

Zensar Technologies Limited - Senior VP & CFO

* Prameela Nagamalati Kalive

Zensar Technologies Limited - COO

* Sandeep Kishore

Zensar Technologies Limited - CEO, MD & Director

* Vivek Ranjan

Zensar Technologies Limited - Senior VP & Chief Human Resource Officer

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Conference Call Participants

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* Amit Chandra

HDFC Securities Limited, Research Division - IT Analyst

* Mukul Garg

Haitong International Research Limited - Research Analyst

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Pankaj Kapoor

JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research

* Ravi Menon

Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst

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Presentation

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [1]

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Good afternoon, everyone. On behalf of HDFC Securities, I would like to welcome you all to the Zensar 1Q FY '20 earnings call. We have with us Mr. Sandeep Kishore, CEO and MD; Mr. Navneet Khandelwal, CFO; and other senior management team members. Without further delay, I would like to hand over the call to Mr. Sandeep Kishore (inaudible) to give us an introduction of the Zensar management team and a brief update on the 1Q FY '20 results. Thank you, and over to you, sir.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [2]

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Thank you, Amit, hello and good afternoon, everyone. Thank you for joining us today to discuss Zensar's financial results for the first quarter of fiscal '20. On the call, I have with me from the Zensar management team, Ajay Bhandari, Head of Strategy and Corporate Development; Navneet Khandelwal, our Chief Financial Officer; Vivek Ranjan, our CHRO; Prameela Kalive, our Chief Operating Officer and Global Delivery Head of Application and Digital Business; Harjott Atrii, Global Head of Cloud and Infrastructure Services business and Sanjay Rawa, our Global Financial Controller.

I will give you a brief overview of Q1 fiscal '20, which will then be followed up by an update on other financial metrics by Navneet, post which we will open the floor for questions.

I trust all of you have had a chance to go through the detailed Q1 FY '20 financial results and the factsheet that we released yesterday. Let me take this opportunity to present some key pointers. All the financial numbers and analysis of Q1 fiscal '20 are without the ROW numbers. As we had mentioned during last quarter call, we have divested the ROW business during quarter 4 fiscal '19, and some residual business remained in quarter 1 fiscal '20. However, to maintain parity of comparison, we have published a factsheet without ROW to ensure consistency.

We had a very good quarter 1 fiscal '20. We delivered on an overall basis $153.3 million revenue, a sequential growth of 3.1%, yearly growth of 16.4% in dollar terms. In constant currency, the Q-on-Q growth was 3.6%, and yearly growth was 18.8%.

Our revenue for the core business had a solid growth of 3.9% and 19.9% on Q-on-Q and Y-o-Y basis, respectively, in constant currency. Our core business is now 96.1% of our overall quarter 1 fiscal '20 revenue.

Both gross margin and EBITDA witnessed a healthy increase in quarter 1 fiscal '20. Gross margin grew by 5%, while EBITDA grew by 11.2% sequentially. Overall, quarter 1 EBITDA stood at 14.2% of revenue. On a Y-o-Y basis, both increased by 10.2% and 16.6%, respectively, all in dollar terms.

In quarter 1, fiscal '20 EBITDA for the core business stood at 14.7%. Our PAT de-grew by 8.3% on a sequential basis. In absolute terms, the decline of $1 million was due to reduced other income that came in last quarter on account of the sale of ROW business and a marginal Ind AS 116 impact, which was partially offset by an increase in the exchange gains as you've seen in the factsheet.

In Q1 fiscal '20, our digital revenue accounted for 48.5% of our overall business, a growth of 6.7% sequentially and 28.3% Y-o-Y in dollar terms. Our digital and application business grew Q-on-Q by 1.1% in constant currency terms on the back of digital services revenue, which grew 3.4%. Core applications in the legacy business, however, declined by 1.1% sequentially.

Our cloud and infrastructure business continued its growth momentum by delivering a solid growth of 17.3% sequentially with cloud digital-led next-gen CIS services increasing by 36.5% sequentially while core infrastructure services grew by 15.3% sequentially. Noncore third-party maintenance business declined by 4.5% sequentially, all in constant currency terms.

All of our regional markets grew well. Growth was led by South Africa market, followed by Europe. South Africa grew by 14.7%, while Europe grew by 4% sequentially. U.S. growth was 2.3% sequentially, all in constant currency.

In terms of business sector, financial services grew sequentially by 8.2%, basis off of solid wins in the Guidewire space, followed by manufacturing at 5.8%. Retail and consumer had a soft quarter with a decline of 10.2% owing to 2 large projects completion and delayed start of some key engagement, again, all of these in constant currency.

As for our acquisition, all acquired companies are now completely integrated into 4 delta businesses, and hence, we are no longer calling out their details separately. We remain optimistic as we continue our large deal momentum into new fiscal year by winning key deals across regions from existing and new clients. This quarter, we booked deal worth $160 million, including key renewals.

This quarter, the growth predominantly was driven from existing clients, new deals as well as renewals from them. Our overall pipeline continues to remain very good and is above $1.1 billion mark as of date. As part of our strategy and as articulated earlier as well, we have continued the investment and business momentum while making deeper inroads into our top-tier high-growth clients. These are clients where we believe potential headroom to grow our business and drive multiservices across applications, digital and cloud infrastructure exists, and where we have strategic advantages.

We have been increasingly successful and are getting better with cross-sell in these identified accounts across our regions, and the numbers have seen significant uptick. As a result, our top-client revenue has been increasing steadily quarter-on-quarter. In Q1 fiscal '20, revenue from top-5, top-10 and top-20 clients grew sequentially at 6.1%, 5.9% and 6.6%, respectively, while growing at 22.9%, 29% and 27.2% on a yearly basis, all in dollar terms.

Account mining strategy also yielded results with the increased number of $1 million, $5 million and $10 million per annum accounts. As of quarter 1 fiscal '20, we have 91 numbers of $1-plus million accounts, 20 number of $5-plus million accounts and 9 numbers of $10-plus million account, increase of 5, 1 and 4, respectively.

Our sustained focus on innovation has helped us double the tally of patents granted in the last quarter while we continue to file more patents, particularly in the areas like our artificial intelligence and automation. Total patent filing now stands at 91, of which 10 have been granted.

Zensar continues to get included across reports this quarter by reputed industry analysts for our capability. Zensar was mentioned in Gartner Magic Quadrant for Oracle Cloud Application Services, worldwide 2019. Zensar was mentioned in Gartner Critical Capabilities for Oracle Cloud Application Services, worldwide 2019.

Hfs mentioned Zensar as rising mid-tier company. Global data covered Zensar's Return on Digital Conclave Analyst and Advisor Day, which was held in April in Boston. Zensar was mentioned in Gartner Magic Quadrant for Data Center Outsourcing and Hybrid Infrastructure Managed Services 2019; Gartner Critical Capabilities for Managed Mobility Services global; ISG Provider Lens Cyber Security Solutions & Services; and Everest Group Digital Workplace Services PEAK Matrix assessment.

Q1 also saw us add more associates. At the close of quarter 1 fiscal '20, our global head count stood at 10,166, a net addition of 418 and 1,376 associates on a quarterly and yearly basis, respectively. Our attrition as of quarter 1 was at 16.7%.

Zensar's RoD NeXT platform and solutions continue to be an integral part of all our large wins so far, and more and more of our clients are benefiting from the RoD and RoD NeXT platform. As mentioned earlier, our digital revenue continue to follow great momentum and have had a stellar growth of 28.3% on a yearly basis and now account for 48.5% of our overall revenue. Most of these platform solutions and services are now featured regularly in leading analyst reports, as we mentioned earlier, like Gartner, Everest, IDC, Forrester and more.

On an LTM basis, we had a total booking of $700-plus million in bookings, including multiple large wins. As mentioned earlier, the demand environment looks healthy. However, there has been a noticeable trend of reducing deal size and tenures, which we believe augurs well for Zensar. We continue to keep investing in business to ensure sustained growth.

With that, I will now invite Navneet, our CFO, to provide update on key finance data, after which we will open the floor for questions. Navneet, over to you.

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [3]

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Thank you, Sandeep. Good day, everyone. Welcome to this call. In addition to Sandeep talking about the business, I will take you through some of the details in financials.

In the first quarter of FY '20, we have reported revenue at INR 10,661 million, which reflects a sequential growth of 1.8 percentage and a Y-o-Y growth of 20.8 percentage in rupee terms. This is our ninth quarter of positive sequential growth consecutively.

In U.S. dollar terms, the reported revenue is $153.3 million, reflecting growth of 3.1% sequentially and 16.4% annually. In constant currency terms for the quarter, company grew by 3.6% sequentially and 18.8 percentage Y-o-Y. The U.S. dollar realization during the quarter has been INR 69.50 to a dollar versus INR 70.50 to a dollar in the previous quarter. The year before in the same quarter, it was INR 67.

Our gross margin for the quarter was 29.4 percentage as against 28.9 percentage of previous quarter. The effective tax rate for the quarter is at 28.4 percentage as against 29.9% in the previous quarter. For the quarter, bill DSO stood at 68 days against 69 days in the previous quarter, while DSO including unbilled stood at 104 days versus 102 days in Q4 of FY '19. The total amount of outstanding hedges as of June 30, 2019, was equivalent to USD 145 million against USD 149 million in Q4 of FY '19. As of end of this quarter, our cash and cash equivalent balance was $72.9 million against $16.4 million in Q4 of FY '19.

With that, I come to the end of my presentation and open the house for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong International Research Limited - Research Analyst [2]

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Good quarter. Sandeep, to start with, your deal pipeline commentary continues to remain very strong. Can you give us some thoughts on the demand environment and growth potential in both near and medium term? And second point was, should we continue to see other areas, compensate for the weakness in the retail space? Or do you see retail bottoming out soon? It has de-growth the last 5 quarters on a Y-o-Y basis, so any thoughts on that would be helpful.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [3]

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Thank you, Mukul. So I think the first part of your question on the demand environment, and we have been calling out the total pipeline and the scale of that pipeline over the last few commentaries that we've given in the quarterly earnings call. It continues to remain very good. That's one. It is not off $1 billion consistently over the last couple of quarters.

Number two, we have been also converting quite well. Over the last 12 months, we won, as I mentioned earlier, $700 million. On an average, we win between $150 million to $200 million. That's roughly the range. Our split between Applications and the Cloud, Infrastructure business is roughly about 60-40. $400 million is roughly the pipeline on the cloud infrastructure business, which is significant considering the fact that it's about 15% of our business. As we had mentioned earlier, we have completely revitalized the service offering in the next-gen cloud infrastructure business, and we are seeing very, very good traction in that market.

On the Application side, as we also called out earlier, most of our pivoting has been towards the digital enterprise. And that is where we continue to see traction in the financial services, particularly in the insurance and in the technology sector. Retail, as you've called out, has been a soft sector for us. And I still think that we have some more work to do. It will take us a few quarters to make sure that we get that network going.

Predominant decline in retail actually has been happening in the legacy and the core application business. And that's the reason also that our legacy application business actually sequentially declined by about 1.1 percentage. We have put a totally new sales team and a client engagement team, including some architects -- digital architects in the retail and consumer sector. Last time, I think Ajay had called out that we are reclassifying and focusing more on subsectors of retail, like retail technology, like going away from the big box retailer into speciality retailers, pet health and wellness, beauty as a sector and, of course, the CPG category.

So we do believe that the offerings that we have, which is omnichannel experience and the cloud infrastructure services are pretty good and with a revitalized go-to-market team in the medium term. I do feel that you should start to see stabilization and growth in the business in retail segment as well.

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Mukul Garg, Haitong International Research Limited - Research Analyst [4]

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Got it. And the second question was on the margin profile. This quarter, the EBIT margin was flat on a Q-o-Q basis. A, how should we look at this on a long-term basis? I know you have been providing guidance on EBITDA margin but given the Ind AS 116 impact, should -- how should we look at EBIT margin? And do you believe you have scope to improve it in this fiscal?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [5]

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Yes, so -- this is Navneet here. We definitely have a scope of improvement on EBIT margins. And that is why we have been saying that internally we have set our target for ourselves to try and hit the 15% EBITDA levels. And we continue to have our focus on the operating parameters to drive to that level. So Ind AS has had some kind of an impact on the EBITDA, which you have seen, which is reported as of now. But despite that, we believe that we should be continuing to look at how we get to the target that we have set out for us is that 15% for the next coming 2 quarters.

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Mukul Garg, Haitong International Research Limited - Research Analyst [6]

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So Navneet, is there a corresponding number for EBIT margin you should look at, which is in sync with this EBITDA margin target?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [7]

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So I mean we don't give any further forward guidance on that. So we've -- I mean we've reported the numbers as of now. I didn't understand what exactly do you seek.

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Mukul Garg, Haitong International Research Limited - Research Analyst [8]

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So EBITDA margin has probably benefited a bit from the lease accounting changes, and that got canceled on the D&A side, so a more comparable number in past would be the EBIT margin. Is there a guidance band you are working with that you can share with us?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [9]

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So with respect to the impact on EBITDA because of Ind AS 116, it has been only reported from prospect effect, which was Q1 margins reflect the Ind AS impact. The prior-period margins do not reflect the Ind AS impact. However, the EBITDA impact, because of Ind AS in Q1, is roughly about 1.4% positive.

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Operator [10]

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(Operator Instructions) The next question is from the line of Pankaj Kapoor from JM Financial.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [11]

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Sandeep, just want to understand if there is any onetime or any pass-through kind of a revenue related to product sales in our business in this quarter?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [12]

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So our -- Pankaj, the CIS business, as I mentioned earlier, which grew exceptionally well. And that kind of a growth has some system integration built-in. It's part of our strategy to focus on markets which are relevant from our point of view, where they're investing, so when we engage our next-generation cloud infrastructure services, as a strategic choice, you have to partner with some of the technology companies like Cisco or Nutanix on service now. And that is always going to be the case. So yes, the answer is there are product FI revenues, which are built-in, but that's the nature of our business. And even going forward, you will see us building on large complex next-gen programs. So this -- it will be there even going forward.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [13]

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Sure. So will it be possible to quantify so we can get a sense of what could be the more comparable growth number on a Q-o-Q and a Y-o-Y basis?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [14]

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Going -- if you're asking me, going forward, we don't give any guidance on [CX] as you know. However, as I explained that we see today on cloud infrastructure continues to be very good, and we're very hopeful that we are going to win and convert those into actual businesses for us.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [15]

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Sandeep, my question actually was on the quarter, like if you could quantify the impact of this kind of a revenue so that we can look at the number -- the more comparable number versus last quarter.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [16]

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Okay. Navneet. We have that number?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [17]

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So Pankaj, we'll have to get back to you on that with the exact details.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [18]

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Okay. Sure. And second, Navneet, the Ind AS 116 impact, can you break it in terms of how much would have been at the interest cost level and how much went into the depreciation level?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [19]

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Yes, sure. So in terms of the interest cost impact is roughly about 600,000 increase, and the depreciation increase is roughly about $1.8 million.

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Operator [20]

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(Operator Instructions) Next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [21]

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Just wanted to check. So if I look at our margins for the quarter at -- on what we have reported and if I do a like-to-like comparison, just [shift] for Ind AS. It looks like on a year-on-year basis, margins are actually fallen by 140 basis points. So if you could just give some color on what's driven the deterioration in margins. And how should one think about it in the context of when things move forward?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [22]

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Yes, sure, Nitin. This is Navneet here. So if you see the decline in margins, let me try and explain to you how the quarter-on-quarter movement has been. If you were to do a like-to-like comparison, you will see roughly about 0.9 percentage decline in the margins. And that is largely on account of 2 factors. Number one is that we had an adverse action impact, if you see the IT realization from the previous quarters have declined. That has roughly about a 0.3 percentage impact on the margins. Apart from that, there has been a reduction in utilization, which has impacted us, so utilization has dipped by 1 percentage plus the kind of investments that we have made for the fresher hiring has also impacted the margins for the current quarter. So a combination of this 2 has what has impacted the margins from a quarter-on-quarter perspective.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [23]

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The second is -- so I was actually suggesting even on a year-on-year basis. But yes, I understand the utilization and fresher hiring, which makes sense. But if we look at next quarter obviously we have compensation increases in-store and what should one expect in terms of impact from there? And second, if you could quantify the net new within the overall TCV that we have reported for the quarter.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [24]

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This is Sandeep here. I think we had mentioned it in probably at the same time last year as well. Our wage increase cycle is from 1st of July every year. So in the July/August/September, which is Q2, you will see wage increase impact coming in, however, with all the levers that we have of pressures and offshoring and lean and automation and more CIS business coming in, we do believe that we have levers to take care of the wage increase during the course of the year. So that's first.

The second is off the deal wins, $160 million that we won, it's difficult to call out the net new versus renewals. But it's fair to assume that it's about a 60-40 ratio. That mean, 60% are actually newer, 40% are renewals off the deals, which actually go through an RFP process. We do not account for smaller effort of new renewals and all that outside of this. Anything which goes through a bid process where we are to compete in what is actually called into this $160 million and also the $700 million, which we have done over the last 12 months. Of the $700 million, roughly half enough. And we actually called that out even in the last analyst call as well.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [25]

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Sure. And lastly, if -- it'd be great if you can give some color on how you see things in terms of sales cycles. Do you see any impact there in the context of what's happening in the macro? And second, within the existing client base, is there anything that you're worried about in terms of headwinds or any such thing over the next 6 to 12 months?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [26]

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So I think -- so the 2 questions. One is sales cycle, have we seen any time line impact. The short answer is no. I still think we are in pretty good shape. The deal movement has been very good. There's nothing unusual that we see here. On the macroeconomic situation, also so far, I don't think we have seen anything which has any significant headwind. Having said that, if the U.S.-China trade war continues, I do believe the tech sector will have a bit of a decision-making impact. Nothing that we have seen so far. But if it continues to prolong, there are some impacts which we'll have to manage.

We are seeing very good traction on our financial services, particularly insurance. That is a sector which is largely -- they need a lot of investments into the whole digital enterprise. That's exactly where we are pivoting, so that has a lot of investment. The cloud infrastructure, as I called out earlier, $400-plus million of total pipeline that we are seeing, which is very good. I mean that's the fundamental reason on why our deal pipeline over the last 3, 4 quarters is north of $1 billion because CIS has joined the party, right? And they're really driving exceptional high-end deals, complex deals, next-gen cloud infrastructure. These are complex in nature. And that also means to answer one of the earlier question that we were alluding to. It needs partnering with the tech majors. So I don't think there's anything exceptional that I think which is happening right now as from where I sit and where I see in terms of elongating deal cycles or something that "worries me." No.

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Operator [27]

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(Operator Instructions) The next question is from the line of Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong International Research Limited - Research Analyst [28]

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Navneet, just wanted to clarify the margins -- comparable margins we need to look at for FY '20 on EBIT side. It would be 10.8%. Is that correct?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [29]

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Yes. So I said -- so Q1, the EBITDA that we have reported is 14.2%. And this has a 1.4% impact on Ind AS. So from an EBITDA perspective, it will be 12.8% as compared to 13.2% of Q4.

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Mukul Garg, Haitong International Research Limited - Research Analyst [30]

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What I was trying to understand was when we look at Y-o-Y movement between FY '19 and FY '20, we are looking at the EBIT margin or EBITDA margin of the new numbers, which -- excluding ROW numbers, which you guys have released. Is that the right comparable we should look at, or should we...?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [31]

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Yes, sure. We have restated all the numbers to remove the impact of ROW in the previous financial years or the previous quarters as well in the factsheet, which we have reported now.

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Mukul Garg, Haitong International Research Limited - Research Analyst [32]

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And then based on this, you believe that you should be able to get some kind of a margin improvement. So on this, can you help us understand the levers which are there, which will help you take care of the wage hike as well as the cost investments which you have done in the first quarter?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [33]

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Yes. So definitely, see one of the points is our utilization has dipped quarter-on-quarter if you will see, so there is some room on the utilization trend as they see. Obviously, the freshers that we have hired, as they get trained and they start get billed, our parameter itself will get corrected, which will also give us a very good improvement on the margin perspective, and then also ask Prameela, my colleague who is there on this call, to give us more perspective on the levers that we are working on from a margin improvement perspective. Prameela?

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Prameela Nagamalati Kalive, Zensar Technologies Limited - COO [34]

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(inaudible) work-in-process for the margin expansion levers, begin this a few quarters ago. And we'll see that this will drive the movement. In fact, we already talked about the freshers will significantly increase the number of freshers are coming on board. That will correct the pyramid. We're also taking a technology approach of lean and automation, all our key service lines. Both these will see the efficiencies kicking in and driving the margin expansion.

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Mukul Garg, Haitong International Research Limited - Research Analyst [35]

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Understood. Have you announced the wage hike for this quarter? This is generally the July quarter. So can you share what wage hikes have you -- average wage hike has been this year?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [36]

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So Mukul, this is Sandeep here. No. We do not give that guidance, but it's pretty much in the same range as what we have done last year. I think last year, on our [auto] wage hike impact, which you saw in Q2, it will be in the same range, the average, in India context, is between -- Vivek, is it 5.6%? 5% to 6%?

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Vivek Ranjan, Zensar Technologies Limited - Senior VP & Chief Human Resource Officer [37]

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Yes.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [38]

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That's the range in India.

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Mukul Garg, Haitong International Research Limited - Research Analyst [39]

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Understood. And finally, the third-party maintenance piece and any update on is that still a work in progress exit from that segment?

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [40]

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Yes. I mean it's still a work in progress. We are right now focusing on both improving the revenue profile as well as the EBITDA of that business. So I think once it's on a upward swing, then we will take a relook at the exit process. At the moment, we're just trying to get the revenues or profits higher.

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Operator [41]

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(Operator Instructions) The next question is from the line of Ravi Menon from Elara Capital.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [42]

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I just want to check the efficiencies to the our (inaudible), at least that's come down from last year Q1 to this year. So do you think that this is a trend that shows that you can actually see (inaudible) process?

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Vivek Ranjan, Zensar Technologies Limited - Senior VP & Chief Human Resource Officer [43]

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Yes, absolutely. In fact -- this is Vivek here. Quite a few initiatives we have taken to ensure that there is a higher retention, and if you see quarter-on-quarter, year-on-year, 18.8% has come down to 16.7%. This is very similar to what is the industry trend. And also typically, in the first quarter of the financial year that (inaudible). But to answer your question, there are quite a few initiatives which we have taken from engagement and learning perspective, which has helped us in retaining our top talent and tower talent.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [44]

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And do you worry that because you are actually training a lot of people on this lateral (inaudible) skills are, what is the demand to buy out? So will these kind of wage hikes, 5% to 6% offshore, will that be sufficient to all the talent?

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Vivek Ranjan, Zensar Technologies Limited - Senior VP & Chief Human Resource Officer [45]

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Absolutely. These are -- there is a lot of talent, and these kids are (inaudible). But having said that, beyond compensation, there are quite a few initiatives which we take to ensure that there's a high level of engagement, and we retain our employees, so our initiatives with respect to retention, it's just not linked to compensation, but there are quite a few initiatives we take to ensure that there's a higher level of engagement.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [46]

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Ravi, this is Sandeep here. Let me also add that this is the average, I think, for our top talent and high performers. That is not the number. We actually pay significantly higher, so our philosophy is to be in the 75th percentile and above for the top talent. So all the people and close to about 20% of our talent get identified as top talent, and they are in the 75-and-higher percentile.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [47]

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And I have a follow-up about the retail controlled (inaudible), so but have we seen that another home improvement chain in the U.S. actually laying off a lot of people. So and giving -- using some cost control measures, trying to improve their profitability. So do you see any kind of similar efforts that your clients that need to be worried about that.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [48]

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I think we're worried about it enough. Now is the time to get some work in retail. We had a few of our customers which went through similar situations a few quarters ago, which we called out at that time. Currently, a lot of our customers are in that category. I think we have started to make the shift from everything old style that we were doing into retail to new age retail, a new sector. The sector that is getting really impacted is the sector that is competing head-on with the Amazons and the Walmarts. I mean that is a disastrous strategy. And that's why you continue to see bad news coming from that sector of the big box -- big box, big home improvement and all because they are head-on with the 2 giants. So one really needs to be smart in terms of picking the categories that you want to go after and making it happen.

I think there is a lot of investment happening overall in retail and consumer in the right area. And that's exactly where our current focus is, and that's why we rejigged the team completely over the last 100 days or so and pipeline has started to look up. And also we are doing retail technology more now than just pure-play retailers. Ajay, you want to add anything?

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [49]

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Yes. So at least as far as (inaudible) is concerned, if you look at the spend of their spending on digital supply chain, CX, omnichannel, I think the -- as far as the capability is concerned, it's in the right area. I think it's just a question of like Navneet said, and we have actually some pretty good clients as well, so dig deeper to get revenue. We have a new sales team, get the new clients work together with the partners. We have managed it as a partner. We do a lot of work that they do in retail and just get the sales engine cranking. I think there may be one of the large retailers who are exiting, but we focus on retail tax, which is growing focus on digital supply chain. There's still growth there. And that's where we are focusing on at the moment.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [50]

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And let me also call on Harjott to add his commentary on the whole next-gen CIS in retail.

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Harjott Atrii, Zensar Technologies Limited - Executive VP and Head of Cloud & Infrastructure Services [51]

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Yes, thanks, Sandeep. So I think the big transformation of the brick-and-mortar retailers are transforming (inaudible) the retail centers to be able to compete with Amazon is to bring in the agility. And for that, there's a strong need to have a cloud-like experience in cloud economics and a managed prior cloud in their own data center. So that is where our go-to-market and proactive next-gen cloud offerings, which have 0 tech touch balanced to our cloud printing the system integration and on their (inaudible), gaining a lot of traction, and we'll start seeing results as we move to the next 2 to 3 quarters.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [52]

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I don't know if, Sandeep, you had noticed that in your press release you mentioned that you've got a contract for Guidewire so called it one of U.K.'s fastest-growing general insurance providers, so don't (inaudible) you had acquired was the capability only for implementation. So could you see that business extending into support? Is this contract very significant? And are you targeting more like these?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [53]

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Ravi, the line is not very clear, but I think I got a gist of the question. Guidewire competence in U.K., beyond implementation. Is that the question? Or would you want to please repeat it.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [54]

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No, that's the question, sir. I was just saying that you acquired only the capability for implementation, if I recall correctly. Good to see that you have these deals that you want for maintenance. And are you going after all of these deals? And how significant is this one?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [55]

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Yes, yes, absolutely. So you actually nailed it quite well yourself. And we mentioned it in my opening commentary, all the companies that we've acquired are now very well integrated into the Zensar core offering, including the Cynosure acquisition that we now did over a year ago. It was done in April last year. So beyond implementation, when we are doing this policy, billings and claims, of course, we don't want to just walk out after the implementation is done because that's exactly what Cynosure was doing preacquisition. And we've added and surrounded strategy of Zensar core services. That's exactly the plan, and we've been very successful.

This particular deal is not a very sizable deal, but it's roughly in the 10 million TCV range. But we feel pretty happy because we are now trying to see the movement beyond implementation, as you called out, and also cloud infrastructure services, so we are bringing the entire cloud services into Cynosure customers as well because the offering that Guidewire themselves have is to actually take the legacy into cloud journey, so it's a full-on strategy from core Zensar offerings, including Cynosure, CIS to these clients.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [56]

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Great. And one last question from me to Navneet, and so the 15% EBITDA that you're targeting, should we now think about it as adjusted for a day as the 140 basis points that you called out?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [57]

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So the EBITDA that we are targeting at 15% is for the core business. And that is what we are targeting at. We will maintain that 15% EBITDA as the pre-Ind AS target that we set. So we'll adjust to that extent.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [58]

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Once we had this quarter, the entire [shell] of the third-party maintenance then?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [59]

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Yes.

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Operator [60]

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The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [61]

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Just wanted your thoughts on by when do you think the residual ROW revenue would run down.

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [62]

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Nitin, Q2 onwards, the ROW revenue is going to be practically an insignificant amount. So in fact, as far as the overall calculations, et cetera, are concerned, we did not factor anything from ROW. And we need just 1 or 2 government plants left where we are doing support. That support is going to continue for a few years, but that amount is really very small, so you can just ignore it.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [63]

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Sir, fair enough. And just one last thing from my side is I think some of your peers have been highlighting sort of significant higher costs of new recruits. And that's potentially sort of hurting margins. I just wanted your thoughts on the same, actually?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [64]

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Vivek, you want to talk about the average cost of new hires?

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Vivek Ranjan, Zensar Technologies Limited - Senior VP & Chief Human Resource Officer [65]

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Absolutely, in fact, thanks for that question. We -- as we said, we typically, when we hire talent from outside and it's the higher end, we position it at 75th percentile. So -- and we benchmark our compensation on a regular basis to ensure that it is positioned attractively. But as I said earlier, it's not only about compensation. What we are doing from the career development and learning point of view also is a huge attraction for prospective employees. So we focus providing wholesome value to employees when we attract them rather than just compensation. But we are able to fulfill all the requirements of [niches] also within the SLAs.

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Operator [66]

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The next question would be the last question, which is from the line of Amit Chandra from HDFC Securities.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [67]

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My question is related to the high-tech vertical that we have, which is 40% of revenues. So first of all, I would like to know the -- how we have been doing with our top customer. So is it growing in line with the company average or is it up? And also in the high-tech vertical, is there any exposure to semiconductor clients -- large semiconductor client because we have been hearing that now because of trade wars, we have seen no slowdown in IT spend on the semiconductors, semiconductor majors, so if you could highlight that?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [68]

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So Amit, Sandeep here. I think -- so 2 parts of the question. Number one is in the top-5 clients, we do not have a semiconductor client. So I think we have one less issue to deal with because semiconductor clients will have some softness given this whole China track, so we don't have that exposure. The first part of your question was about our top customer. You will actually see that in our revenue from top-5 client. We do not declare the top customer revenue. The top 5 had a very high percentage from the top customer themselves and has consistently grown. A year ago, it used to be 36%. Now it is 38% of our total business.

And so we continue to gain market share in our top customer. We have completely rewired our service offerings, our go-to-market. We're aligned to where the investments from that client is happening is a new age of as-a-service. That is what is really kicking quite well, particularly into the tech sector. Everything is being invested into as-a-service. So our pipeline in that account looks very good. We gain market share over all the Tier 1s. So so far, we feel quite good about it.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [69]

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And sir, my second question would be related to the hire on site -- on site mix. So the hire the on-site mix has been increasing. So I know that it's related to the deals that we have been winning. So it's mostly on-site led. So can we see the offshoring as in marginally we're going forward and also the rise in the fixed-price contract that we have seen. It has been relatively study over the last many quarters. But that we only see that rising fixed price leads to higher margins, but we have not seen that reflecting our expansion margins. So can offshoring and higher fixed price can be a margin lever from here?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [70]

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Yes. I think they're both -- the short answer to both of that is, yes, I think the long answer is when. It's part of our strategic alignment to make sure that we are relevant to our customers. Of the approximately 1,300 additional head count that we added year-on-year, if you actually just look at the numbers from the factsheet, it's simply called out in 3 buckets, 500 on-site, 500 offshore and about 300 freshers that we called out earlier, which was hired last quarter, so it's a significantly higher number of on-site hiring, but it's also by design.

Some is because, particularly in our cloud infrastructure business, some of the government contracts that we have won, they are -- they need to be delivered from on-site and some very strategic large manufacturing client also in CIS that we won, currently, is in 100% on-site sales. Over a period of time, we are going to move as we drive more tool- and device- and automation-based. It will get driven from offshore. I think we are still a few quarters away from that.

And that's the reason why you have not seen the margin from fixed-based managed services start to reflect yet. But over a period of time, it will. It's a strategic choice that we make. Our choice right now is to increase our business momentum and sales momentum so that we are inside of these high-growth account. Once you're inside the high-growth accounts and you are in a steady state, you have much better levers available to drive profitability, and that will happen as we have committed 15% core business EBITDA. We are sticking to it in the medium term. That's the whole focus of the management team. And we're pretty committed to that.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [71]

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And sir, lastly, on the BFSI vertical. So I know that BFSI vertical is particularly South Africa heavy. So how is the -- how is the contracts there? Is it short term in nature or long term in nature because we have seen pretty healthy growth in BFSI. So this -- so the recent deal wins that we have -- we had there, so what's the average dilution of the contracts there? And how you're seeing the competition panning out there in the African market.

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [72]

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The BFSI revenue actually is fairly equally spread. So we have almost 40-odd% coming from U.S. and the 3 -- 30 30 coming from U.K. and South Africa. So it's actually one of the new businesses that are well spread throughout the globe, out -- at least throughout our chosen markets.

The second point is that BFSI includes insurance and a large part of our growth actually comes from insurance and these days. Well-covered is led by the property and casualty space largely from the Guidewire capability that we acquired, but we also have earlier BFSI claims that seem to be growing, so a lot of growth is coming from there.

So most of the Guidewire contracts tend to be project-specific. There could be the new ordinances, 1 to 3 years depending upon how large is the portfolio model that get implemented. But also there's a lot of deals that we are winning in South Africa, which comes from legacy modernization, which includes support and development. Those are more 5 to 7 years, so there's a healthy mix of long-term contracts as well as -- but key because most of the Guidewire projects are at the heart of digital transformation of any P&C provider, which includes courses and data, so it improves all 3.

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Operator [73]

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I would now like to hand the conference over to Mr. Sandeep Kishore for closing comments.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [74]

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Well, thank you so much for joining the call and look forward talking to you again in our quarter 2 earnings call. Thank you very much.