Zensar Technologies Ltd (ZENSARTECH) Q2 FY23 Earnings Concall Transcript

Zensar Technologies Ltd (NSE:ZENSARTECH) Q2 FY23 Earnings Concall dated Oct. 20, 2022

Corporate Participants:

Mukul Garg — Motilal Oswal Financial Services Limited — Analyst

Ajay Bhutoria — Chief Executive Officer and Managing Director

Sachin Zute — Chief Financial Officer

Nachiketa Mitra — Global Head of Banking Financial Services and Insurance

Harjott Atrii — Global Head of Hi-Tech and Manufacturing

Analysts:

Mihir Manohar — Carnelian Asset Management — Analyst

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Nitin Padmanabhan — Investec — Analyst

Amit Chandra — HDFC Securities — Analyst

Sandeep Shah — Equirus Securities — Analyst

Chirag — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Zensar Technologies Limited Q2 FY’23 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. And I’ll hand the conference over to Mr. Mukul Garg from Motilal Oswal Financial Services Limited. Thank you, and over to you, Mr. Garg.

Mukul Garg — Motilal Oswal Financial Services Limited — Analyst

Thank you, Neerav. Good morning, everyone. On behalf of Motilal Oswal Financial Services, I welcome you all to Zensar’s Q2 FY’23 earnings call. We have with us today Mr. Ajay Bhutoria, CEO and Managing Director of Zensar Technologies; Mr. Sachin Zute, CFO, and other senior management team members.

Before I hand over the floor to Ajay, I would like to highlight that the Safe-Harbor statement on the second slide of the analyst presentation is assumed to be read and understood. With this, Ajay, over to you.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Thank you, Mukul. Good morning, good afternoon, and good evening, everyone. Thank you for taking the time today to discuss Zensar’s financial results for the second quarter of FY’23. With me on the call, I have a few others from the Zensar leadership team, Sachin Zute, our Chief Financial Officer; Prameela Kalive, Chief Operating Officer; Vivek Ranjan, our Chief Human Relations Officer; Harjott Atrii, Global Head of Hi-Tech and Manufacturing; Samir Gosavi, Global Head of Consumer Services; Nachiketa Mitra, Global Head of Financial Services; Manikandesh Venkatachalam, Global Head for Markets for service lines; and Ankush Akar, Global Financial Controller.

The second quarter of FY’23 stood steady for us with revenue of 155 million representing quarterly year-on year growth of 14.4% and a sequential quarter-on-quarter growth of 1.6% in constant currency. In reported currency terms, we registered quarterly year-on year growth of 9.3% and sequential Q-on-Q decline of 0.5%.

Before we go through individual business level performances, let me spend some time on the trends we see in the global market and IT industry today. There has been a deceleration in the demand environment, driven by softness in global macro factors. This is also reflected in broader market indices. As such, we have seen margin pressures across companies including the Fortune 2000. In this environment, we have seen a segment of our clients, particularly in the HTM and CS verticals, deferring or optimizing their discretionary spend and scaling back their budgets.

That said, let me walk you through the performance of our geographies and verticals for the quarter. All growth numbers are in constant currency. The U.S. region registered quarterly year-on-year growth of 11.1% and the muted sequential quarter-on-quarter growth of 0.4%. We continued to show growth in this region aided by momentum in the BFSI vertical, which helped to offset headwinds in HTM and consumer services verticals.

We registered modest growth in Europe with quarterly year-on year growth of 25.9% and a sequential quarter-on-quarter growth of 1.7%. We have witnessed good deal wins especially with existing clients in this region, despite global uncertainties.

The South Africa region too continued its growth momentum with quarterly year-on-year growth of 16.4% and a sequential quarter-on-quarter growth of 9.1%. We continue to have positive traction in this region for our offerings in cloud, data and advanced engineering services resulting in ramp-up with some of our key banking and retail clients.

Moving to our verticals. BFSI continued its growth trajectory with the quarterly year-on-year growth of 33.8% and a sequential quarter-on-quarter growth of 6.1%. We are witnessing good traction in this vertical from both longstanding and new clients. Over the last few quarters, we have added marquee new logos including from the Fortune 500 group, which enabled significant headroom for growth. We are scaling these accounts through our verticalized offerings as well as through advanced engineering and data services.

In Q2 FY’23, growth has been flat for HTM and emerging verticals with a quarterly year-on-year growth of 6.5% and a sequential quarter-on-quarter growth of 0.1%. Our consumer services vertical registered quarterly year-on-year growth of 5% and a sequential quarter-on-quarter decline of 2.5%. As I noted earlier, we anticipated a slowdown in growth along these two verticals. To negate the impact, we continue to drive our efforts with targeted industry aligned solutions while also strengthening our go-to-market initiatives and focus on existing and newly opened accounts.

Our gross margin stood at 25.3% in Q2 FY’23 representing a sequential quarter-on-quarter decline of 120 basis points. Our EBITDA stood at 8.5%, a sequential quarter-on-quarter decline of 270 basis points. We ended the quarter with a net cash position of 162.1 million. The order book for Q2 FY’23 stood at $141.8 million supported by multiple wins across verticals and a healthy mix of new wins and renewals.

For the second quarter, our last 12 months attrition stood at 26.3%. Our in-quarter attrition trend has seen significant improvement by more than 450 basis points. This quarter, we gave one of the largest salary increases in our recent history, which has been well received by our associates across all levels. Our global headcount at the end of Q2 FY’23 stood at 11,250 associates. The momentum in our fresher program remained strong. We onboarded more than 1,200 freshers in the second half of FY’22 and another 400 in the first half of FY’23, which has reduced our dependency on lateral hiring. Our clients have responded positively to this program. This is a credit to our new expansive learning and development program and our robust gating process.

In all, we have seen both an uptick in fresher deployment and improvement in our pyramid. Our service lines continue to scale up and deliver targeted solutions for our clients. Overall, we have seen a rise in multiservice lines this quarter. Our focus for the clients, advanced engineering services and data engineering registered 7.4% and 16.8% sequential quarter-on-quarter growth respectively. We are witnessing notable movement in our digital engineering services with multiple wins in cloud migration, cloud modernization and enterprise transformation. Likewise, our data engineering services are experiencing a similar event with strong revenue growth and multiple industry recognitions in recent quarters.

As always, I am excited to speak about the work we do for our clients. We continue to deliver value through integrated solutions, encompassing multiple capabilities and serve the clients. Let me take a few minutes to share some examples of our high-impact work. We partnered with a major American insurance provider for modernization of the data warehouse using cloud-native data services. This re-architected platform helped the client reduce the reporting efforts for policies, billings and claims thus optimizing their support and maintenance costs.

We were selected as a partner by a specialist investment management firm to provide application development services. We followed a design-led approach for digital engineering which helped in industrialization of development practices across the company. We worked with a U.S.-based omnichannel retailer to modernize their enterprise platform and partnered for the company’s POS transformation program, which has helped the company achieve stability, scalability and higher resiliency in its applications.

In the cloud and data engineering space, we worked on the AWS migration of services workloads for leading all in that company. A leading South African bank partnered with us for their product suite modernization with scope of work included consolidating 15 lending applications through common platform, which helped the client rationalize its application portfolio leading to a reduction of cost and effort.

We were selected as as strategic partner by a global air logistics leader for its application management and platform modernization initiatives. Our cloud-first total experience approach is helping the client to run the business and modernize grid systems with minimal disruption.

We continue to make strides in our sustainability journey in line with our published ESG vision and mission. We have successfully launched Phase 2 of our official sustainability microsite and it is now readily available to our stakeholders, in support of World Health Day 2022, we aligned with the World Health Federation’s month long campaign communicating both internally and externally for the benefit of our associates globally. We also participated in various forums including the 15th Edition of Environment and Energy Conclave and the Asia-Pacific CEO Roundtable hosted by the UNGP NI and ACP [Phonetic] where we presented the ESG best practices at Zensar.

In closing, our order book has steadily increased, despite global uncertainties. We continue to invest in our fresher program for better control of our supply chain. On the margin front, we are working with utmost discipline and diligence. We are focused on the six identified margin levers to drive meaningful improvement in the medium term while also ensuring a healthy allocation for growth. While we continue to navigate macro-induced headwinds, we are certain that secular long-term growth in the IT industry will not diminish, as business transformation and tech spending have become core to the client journey towards long-term growth.

In the past year, the changes we have made to sharpen our services, improve our go-to-market and invest in our talent have — made significant results. We are confident that Zensar is emerging stronger as the preferred global partner for our clients worldwide. With that, I will now invite Sachin Zute, our Chief Financial Officer, to provide an update on critical financial data after which we will open the floor for questions.

Sachin Zute — Chief Financial Officer

Thank you, Ajay. Good day, everyone. Welcome to this call. In addition to Ajay talking about business, I’ll take you through some key financial metrics. In U.S. dollar terns, the company reported revenue of $155 million for the second quarter of FY’23, reflecting decline of 0.5% sequentially and growth of 9.3% year-on year. In constant currency terms, however, revenue growth for the quarter is 1.6% sequentially and 14.4% year-on-year. The U.S. dollar realization during the quarter has been INR79.6 per dollar against INR77.1 in the previous quarter.

Our gross margin for the quarter stood at 25.3%, 120 basis points lower than previous quarter, and EBITDA stood at 8.5%, 270 basis points lower than the previous quarter. Decline in EBITDA was primarily due to wage hike impact of 320 basis points and negative impact due to overall currency movement of 20 basis points. The benefit of 3.1% USD INR depreciation was negated by other cross currency movement with GBP and [indecipherable] depreciated by 6.3% and 8.5% respectively. In line with what we shared in Annual Investor Conference last month, we continue to drive disciplined program for margin improvement through measures such as increasing fresher deployment, improving commercials, optimizing operational metrics and rationalizing costs. This has helped us to partially mitigate the impact of wage hike in the current quarter.

Given the steps taken, we believe that we have bottomed out on margins and expect to see improvement from current levels. At the same time, we continue to focus on achieving our long-term objective of predictable growth by making growth driven investments into the business. For the quarter ended September 30, 2022, DSO including unbilled stood at 80 days as against 83 days in previous quarter. For the quarter, cash and cash equivalents including investments in mutual funds stood at 162.1 million, post dividend payout of 9.7 million and annual variable payout for FY’22. The effective tax rate for the company has remained flat at 26.3% against the previous quarter.

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

Questions and Answers:

Operator

Thank you very much. We’ll now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.

Mihir Manohar — Carnelian Asset Management — Analyst

Yeah, hi, thanks for giving the opportunity. My question was on the margins, I mean, you know, we have seen margins going down 300 basis points QoQ. I mean we understand that you had indicated about the large wage hike that you had given, but I mean just wanted to understand what is the thought process now because when we see the situation currently, I mean the demand environment is looking weak as per your commentaries, and despite that, we are giving one of the large wage hikes. So, I mean, how are you seeing the situation now and your guidance of mid-teens kind of margins which was there in the — by second-quarter — second quarter of FY’24, I think becomes really difficult to understand as to how you will be able to achieve that given now actually demand is slowing down and we’re having a utilization which is 80%, so just wanted to understand what is your thoughts on that.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Sure. But I’m not sure I — this is Mihir, right?

Mihir Manohar — Carnelian Asset Management — Analyst

Yeah, yes.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Yeah, Mihir. So, Mihir, thank you for the questions. So let me start by saying that we have bottomed out on margins, right. You see what happened — what led to this situation was largely driven by unprecedented attrition that we suffered and a huge dependence that we as a company had for lateral hiring to drive growth that we saw over the last six quarters, right. We have put very significant measures in place starting with a very expansive freshers program. In addition, we are running a very disciplined ship to improve margins across six levers that Sachin mentioned. That’s improved service mix, improved commercials, improved utilization, optimized pyramid, optimized support costs and optimized cost of talent acquisition. The way we are running this ship — the way we are enforcing the discipline, right, and even after factoring that we see is softness in some segments of our business, we are sanguine that we will achieve our stated objectives of margin target and like I said we are firmly of belief that we have bottomed out this quarter. And that the margin steadily improve from this point onwards. Sachin, would you like to add?

Sachin Zute — Chief Financial Officer

Absolutely, Ajay, what you said there are six programs which we are internally running and we have started seeing initial success of each of this program and in spite of the softer environment which you referred to, we believe that the discipline and the rigor which we have put in the organization will help us to improve our margins from Q2 levels.

Mihir Manohar — Carnelian Asset Management — Analyst

And just one question on the demand side because I’m going to highlight as per verticals. So I mean the consumer services is facing inflation pressure and solutions similar kind of pressure is continuing, I just want to make sure as well.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Yeah, so we see segments — because of what’s happening with the macro economy, we see segment softness and this softness is helping — hitting us on both fronts. One is within our HTM and consumer services verticals. And also a large part of this is resulting in reduction of discretionary spend segments of our clients. So our service line which caters to a lot of the discretionary spend that you experience and design services has also suffered a bit because of that. We foresee in the short term these headwinds to continue. We also believe that the long-term secular demand trajectory won’t go up. So in the short term, the headwinds will [indecipherable], but in the medium and long-term, the secular demand scenario continue to look upwards and will then assist the growth of consumer services and also segments of our hi-tech manufacturing verticals.

Mihir Manohar — Carnelian Asset Management — Analyst

Sure. That’s it from my side. Thank you.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Mukul Garg from Motilal Oswal. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services Limited — Analyst

Yeah, thank you. Ajay, just wanted to follow-up on the query about HTM and consumer. What’s the outlook for both of them in the near term, you usually have a fairly pronounced furlough impact in Q3. Is that something which we should anticipate this year as well given the kind of preemptive weakness we have seen during this quarter and by when do you expect the revenues from these two verticals will start stabilizing from a growth perspective? And then, is this something which is likely to overshadow overall company growth over the next one to two quarters?

Ajay Bhutoria — Chief Executive Officer and Managing Director

Right. Hi Mukul. So let me start by addressing the second part of your question first, right, so last quarter also we had indicated that there will be short-term blips due to economic condition, even though in medium to long term, secular demand scenarios are positive. So we still maintain that view. And then we see signs of softness due to macroeconomic conditions in certain industries and around certain types of spending, largely discretionary spending. We are keeping close watch over this and we have been very close to our clients. Now having said that, the areas where we made investments such as engineering, data, platforms is bearing fruits, standing strong. And we continue to drive thrust and see results, right. Now, overall, right, if you look at what’s happening in hi-tech manufacturing, we will see furloughs in this holiday quarter and the furloughs will be in line with what we have seen in the previous years, right. So that’s hi-tech manufacturing and consumer services largely but overall from our overall portfolio we will see furloughs and we will see impact of that in the holiday quarter.

Having said that, as we go forward and as the economy stabilizes, as the spend from our clients stabilizes and as discretionary spend comes back, in the third — the last quarter of this fiscal or in the following quarter or two of the following fiscal, right, we will see these two verticals come back on track. We believe that our banking financial services vertical and banking financial services and insurance vertical will continue to thrive in the current environment because the current environment is conducive and all the investments that we’ve made in the vertical are bearing very strong fruits, right.

The last thing I will say is that we are not entirely dependent on what’s happening with the economy and its impact on hi-tech manufacturing and consumer services vertical. We are continuing to drive thrust in especially areas which impact the core of our clients by providing services and by increasing pipeline. And as we see, we see green shoots of that thrust which will pay us back over the course of next couple of quarters.

Mukul Garg — Motilal Oswal Financial Services Limited — Analyst

Sure, and also just continuing on this improvement in the BFS space. Can you just share your thoughts on the use of cash which you have right now. BFS has now grown to be your second largest vertical after you acquired M3bi, of other areas where you are looking to deploy cash to further lower your exposure to the declining hi-tech space and kind of maybe grow a particular sub-vertical within BFS or enter a new area of the kind of focus for clients.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Right. So Mukul, we then continue to bubble down on BFSI, we made strong investments. The investments are bearing very good fruits both core organic business of BFSI as well as the benefit that we got from the M3bi acquisition and both of these engines are firing very well. And as we see right now, we see that trend not diminish, it will continue. As we look forward and as you rightly said, right, that we are sitting on a sizable pile of of cash, 152.1 million after paying off the variable comp and dividend, right, so after that, we’re still sitting on sizable — we are constantly also evaluating opportunities to expand inorganically and our approach towards that continues to be that we will [indecipherable] right acquisitions. And we are evaluating that space including right now very seriously and in areas that bring us capability, scale, market access and also supports us from the areas of business that are seeing momentum, the areas where we see market spend increasing over a period of time and the areas where market trend continues to be positive so that we are constantly evaluating, Mukul.

Mukul Garg — Motilal Oswal Financial Services Limited — Analyst

Thank you. That’s all from my side. I’ll get back into the queue.

Operator

Thank you. [Operator Instructions] Next question is from the line of Sameer Dosani from ICICI Prudential Asset Management. Please go ahead.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Thanks for the opportunity. So, Ajay, you’d mentioned and we have invested a lot in the freshers program and we have hired around 1,000 freshers. Can you share some details around — this also in Q4, right, so can you share some details around what is the number of freshers that you hired in last three quarters and how much of them have been deployed till date? And if you can just think about how much — and what is the deployment strategy going to be and how this will help our margins, can you just quantify that also? Thanks.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Sure. So Sameer, we have completely revamped our fresher program four quarters back. Okay. Now, in the second half of FY’22, we hired over 1,000 freshers, in the first half of FY’23, we have hired more than 450 freshers, right. It is one of the strongest programs that we have put in place and like I mentioned in my transcript, right, that this kind of program, the learning and development as well as the gating program that we have put in place has been a strong success. And what we now see especially in this quarter is that fresher deployment significantly rising, the acceptability of freshers by our clients significantly go up and overall billability substantially increasing. So it has been a very successful program for us and we will continue to drive this program to support our growth as well as to reduce dependency on the lateral market.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

How many freshers will be deployed from this 1,450 freshers that we would have hired in last — from H2 onwards?

Ajay Bhutoria — Chief Executive Officer and Managing Director

Yeah, so Sameer, we don’t disclose the exact numbers, but I will tell you that from the H2, a sizable population of the freshers has been deployed and we are tracking to our targets. And one of the reasons why we were assisted from a pyramid optimization perspective and we got the benefits on our overall gross margin, so despite 320 basis points of worth of wage hikes, the actual impact on gross margin and EBITDA was reduced on a big part because of the fresher hiring program and we will continue to track that — the results are very encouraging is what I can share with you.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Okay. And as you mentioned about the margins that they have been — these margins have bottomed out. What do you think retail — these three segments that we have seen pressure on, they have also bottomed out, we won’t see much declines from here, maybe there can be some softness but decline essentially has been arrested. What do you think about that? Thanks.

Ajay Bhutoria — Chief Executive Officer and Managing Director

So — and if I may just clarify, are you talking about revenue?

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Revenue, revenue — from revenue point of view.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Revenue point of view, right. See, the macro softness that we have seen and the impact of that in certain segments of industry that we serve, that will continue in the short term, right. And then we’ve got the holiday quarter with furloughs coming up, so we will see some softness in that but there are two factors. One is that we are very sure — we are very certain that the long-term secular demand is going to continue to thrive and the turnaround will happen either two quarters out or three quarters out soon as the new baseline is established, and that is going to favorably impact us for both these verticals HTM and consumer services. Having said that, we are not obviously waiting for the economic turnaround to happen. We put some major, major sales motions in place and the pipeline in these two verticals is beginning to look quite healthy, right. So the short-term softness, we will look to offset with direct growth in our business momentum as well as turnaround in economy and the improvement in discretionary spend by our clients.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

So just to clarify, softness would mean a lower growth or no growth or do you think there could be some decline also, that is what I —

Ajay Bhutoria — Chief Executive Officer and Managing Director

Sameer, so we don’t guide — so this is why I gave you a qualitative commentary in terms of what’s happening in the economy, impacts of it on our business without getting into providing specific guidance.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Okay. Thanks.

Operator

Thank you. Next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec — Analyst

Yeah, hi, good morning. Thanks for the opportunity. Actually two questions. So one is on the — if you could give some color on insurance. So. I think one of your larger peers basically mentioned that there are headwinds on the P&C side of insurance and lot of weakness. I just wanted your thoughts on how would our exposure to P&C be within the insurance vertical and how are you seeing the broad demand trends there both on a near-term and medium-term basis.

The second is, it looks like the top client bucket has done quite okay, it’s actually grown. I just wanted to understand not the top clients specifically, the top five is what I meant. So. which vertical really sort of pushed that, is it banking or something on the emerging side? And finally, if you could give us some color on the emerging vertical side as to what all are there within the — which sort of sectors within that is really driving the growth?

Ajay Bhutoria — Chief Executive Officer and Managing Director

Right. So Nitin, hi, let me just highlight and then I’ll request Nachi Mitra who is Global Head of Banking Financial Services and Insurance for us to give you additional color. So insurance business for us continues to be strong, right. We grew 3.99% quarter-on-quarter sequential and 16.6% year-on-year. So that continues to be strong. And today, we have divided our book into three parts, all the three parts are firing, and I would actually request Nachi to give you a view of what is going on and then I’ll answer your questions on top client bucket as well as emerging vertical. Nachi?

Nachiketa Mitra — Global Head of Banking Financial Services and Insurance

Thank you, Ajay. And thanks Nitin for asking the question. From a broad trends perspective, we are seeing pretty good traction, we specialize in P&C, right. And we specialize in one of the primary software being used in the P&C industry and we don’t see any slowdown, in fact, more and more clients in that segment are moving to cloud, so we see lot of opportunities in that, we see lot of clients wanting to move to digital, we see traction in that. So, overall, what we also are noticing from an insurance standpoint is that many of the clients want to optimize their budget, that also is an opportunity for us to be very creative, and that’s why we are also called to the table and [indecipherable] they do transformation programs. So we are on blip side, they run the business and change the business, they see us as very valuable partners and it has taken some time to get there but I think we have established a name for ourselves and we have a very strong capability right now to have that kind of traction with our clients.

There was a second part of question, Nitin, I missed. If you can just repeat. And also let me know if my answer kind of addressed your question?

Nitin Padmanabhan — Investec — Analyst

Yeah, so, this incrementally, Nachiketa, is. see, historically the insurance business has been little volatile. I think as those Guidewire projects get over, the revenue comes off and then it — sort of weak for some time and then there is a spike. So, just wanted your thoughts on the pipeline and how comfortable you are in terms of being able to sustain growth rates here or do you expect it to continue to be sort of lumpy, right, because you need a steady flow of business to maintain consistent growth rate. So what is it that you’re doing in this business to sort of reduce the lumpiness and have a little more consistent kind of flow of growth?

Nachiketa Mitra — Global Head of Banking Financial Services and Insurance

Yeah, thank you, Nitin, I think you’re spot-on in terms of the concern that you raised. Earlier, we would — we are very project focused in Guidewire implementation, but as soon as that implementation is over, we would be actually looking at a cliff. What we are trying to do very actively now, Nitin, we’ve just flown the implementation how do you support the client after the implementation, right, which gets into more annuity-based revenue model. That’s number one.

Secondly, we are also trying to change the mix of our clients, you know, having clients who are very, very small to clients who are mid and Fortune 1000 and Fortune 500 where they have a wider array of needs, right, and then the third part of the equation is, Nitin, based on this relationship that we have, every client has an infrastructure requirement, every client has a data requirement, it’s just not Guidewire. So one of the key messages is we will do Guidewire implementation and then support it as well. Secondly, we are more than Guidewire, of the rest of the 98% of the organization, we do data, we do experience, we do infrastructure and recently we have had some significant wins in new areas, so we are opening up new frontiers in the insurance domain and then we are also trying to diversify as much as possible into other segments of insurance. We are having very active conversations in life and annuity as well. So overall, I think we have been able to bucket the insurance business from the vagaries of the peaks and the valleys and I think we are very well geared up to have very strong business going forward. Does that answer your question, Nitin.

Nitin Padmanabhan — Investec — Analyst

Yeah, it does. Thank you so much.

Nachiketa Mitra — Global Head of Banking Financial Services and Insurance

Thank you.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Thanks, Nachi. And Nitin, so your second question on top client bucket, right, it has grown, game of two [indecipherable], part of the top client bucket has softness, another part of the top five client bucket has performed extremely well. Net-net we have done extremely well in the top five client bucket. In terms of emerging vertical, again done very well. It’s a vertical that runs smart cities, health tech etc right and it has done very well and for that if I can request Harjot to provide some additional color.

Harjott Atrii — Global Head of Hi-Tech and Manufacturing

Sure, Ajay. Thank you. So, Nitin, in terms of the emerging vertical that Ajay mentioned, we are seeing the growth. We entered these verticals [indecipherable] in the last few years but largely. So they continue to sustain and we are growing those relationships as well. And these were signed with large customers which had a significant headwind for expansion as well. So we are encouraged with what we see in the pipeline for emerging as well as [indecipherable] vertical.

Nitin Padmanabhan — Investec — Analyst

Sure, thank you, that’s helpful. So just one thing on the second question, was that — what I was asking was which — within those top five, which vertical actually contributed to growth, is it banking — is it a banking customer, what really sort of drove, what are the positives and negatives from a vertical perspective on your top five?

Ajay Bhutoria — Chief Executive Officer and Managing Director

Yeah. So, Nitin, surprisingly it was across, so not just banking but then supported by other verticals as well. What I can share with you is the part of the top five that grew was across an outside of banking as well, so yes there was a banking involvement in that work but there was non-banking as well.

Nitin Padmanabhan — Investec — Analyst

So that’s helpful, thank you so much and all the best.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. Next question is from the line of Amit Chandra from HDFC Securities. Please go ahead.

Amit Chandra — HDFC Securities — Analyst

Yeah, thank you, sir. So thanks for the opportunity. Sir, my question is on the margin trajectory, so you mentioned that the margins have bottomed out and earlier we mentioned that we aspire to reach mid-teens by second quarter of next year. So are we on track to achieve that? And also, in terms of the wage hikes that we have provided this year, is it higher than what we have given last year or is it in line with what you’ve planned earlier?

Ajay Bhutoria — Chief Executive Officer and Managing Director

Sure, Amit. I would actually defer that question to Sachin. Sachin, can you take that question?

Sachin Zute — Chief Financial Officer

Sure Ajay. Thank you. So Amit, obviously, this particular quarter, we had 320 basis point impact of wages against 250 basis points impact which we had last year same quarter. Now, as we discussed during the annual investor conference as well, there are six tracks which we have put in place and each of us are working very judiciously in executing the plans which we have put under each of these plans — under each of these tracks. Now, given the success which we have been in Q2, that gives us fair confidence that we have — we might have actually bottomed out as far as margins are concerned in Q2 and as we discussed our aspiration to be mid-teens by next year Q2 continues to be there and every work is going in that direction. So I think we are currently tracking to hit mid-teens by Q2 of next year.

Amit Chandra — HDFC Securities — Analyst

Okay and sir–

Ajay Bhutoria — Chief Executive Officer and Managing Director

To your other question, Amit, the wage hike that we have given this year is unprecedented and it’s higher than what we have given at least for the last 10 years if not longer. And that was primarily because If you recall, until last quarter or the LTM last 12 month attrition was 28-point some percent, right, 28.1%, and we just decided to take the bull by the horns, we gave a very substantial hike with impact on margin by 320 basis points and we see a very positive impact of that on the attrition rate for this quarter for Q2. So very quick answer to that part of your question.

Amit Chandra — HDFC Securities — Analyst

Okay and sir on the incremental growth over the last three quarters we have been seeing that emerging vertical and from the services perspective cloud and infra that has been actually doing pretty well for us, so it is fair to assume that these contracts are largely on-site contracts or the margins in these contracts are certainly lower than what the company level averages, so that’s why the impact on the margins is seen apart from the wage hike that we have given. So these contracts are fairly low-margin contracts and also in terms of the PCV, the impact we are seeing, if you can provide some clarity on what was the renewals versus net-new and also in terms of the new deals which we are winning and how is the offshore component in it and are you seeing some pricing benefits in these deals?

Ajay Bhutoria — Chief Executive Officer and Managing Director

Sure. Amit, so first of all is that if you see the services that are firing really well, which is advanced engineering services, that grew for us quarter-on-quarter over 6%, and data engineering services that quarter-on-quarter grew for us 16.8%, actually advanced engineering 7.4%, sorry. So, these are strong service lines and they attract very good commercials. Okay. So this we feel pretty good about and confident about that this growth is if anything margin — it’s very clearly margin accretive. Now, in terms of the deals we have won, with the exception of maybe one deal, most of these are global deals, which means they have an onsite component and offshore component, right. And then both — given that we are tracking our target margin profile, right, so these are not margin-dilutive. Just wanted to give very clear guidance to you in terms of — very clear data points to you in terms of what’s happening with our deal wins and its impact on margins. And the last question that you had. Look, this time, the order book has been 141.8 million, which is a little over 13.5% growth over the previous quarter. So the order book has been healthy. And the order book between new and renewals is 40:60.

Amit Chandra — HDFC Securities — Analyst

Okay. Okay sir, thank you and all the best for the future.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. Next question is from the line of Amit Shah from Equirus Securities. Please go ahead.

Sandeep Shah — Equirus Securities — Analyst

Yeah, thanks for the opportunity. My name is Sandeep Shah, not Amit Shah, just to clarify. The first question is. I think when do you expect well balanced growth across verticals because BFSI has been doing a heavy-lifting for so many quarters, so on a high growth base, the growth may burn out going forward or you believe now BFSI may continue to do well and that has helped us in terms of the organizational level growth to continue, because we still expect the affected vertical of hi-tech manufacturing and consumer to remain soft at least in the near term.

Ajay Bhutoria — Chief Executive Officer and Managing Director

So, hi, Sandeep. Look, for, I would say all parts of our business be it the three verticals or the five service lines, what we have endeavored to do is put grass root strength both in terms of our capability as well as in terms of our go-to markets and the kind of projects that we are addressing. What I can say confidently is that BFSI [indecipherable] that we have created and what you also heard from Nachi in terms of specifically what’s happening with insurance, this is a very resilient industry, right, and I think this will continue to do very well. I don’t see any issues in the near term or far term in BFSI. What will happen is what we are hoping that as the industry headwinds stabilize, right, that will go back to driving our strength in the other two verticals. If you saw what we did last year with both hi-tech manufacturing and consumer services, we had good spectacular years, right, and then we got hit by the economic headwinds which particularly affected the segment that address, the customer segment and the industry segment — sub-segments that we address in these two verticals. And we are putting in place sales motions as well as capability motions that will make us more resilient. So I also feel confident that these are short-term issues and that in the medium-to-long term we are on the right track.

Sandeep Shah — Equirus Securities — Analyst

Okay, and just in terms of entering into Q3, generally we have furloughs especially from some of our top clients in the hi-tech and what we are hearing from some of the peers this time there could be normal furloughs in some of the clients in hi-tech and manufacturing. Are we also witnessing the same at this time the furlough impact in Q3 could be higher than last year Q2?

Ajay Bhutoria — Chief Executive Officer and Managing Director

So Sandeep, what I can share with you right now is that and of course you know things change as we go forward but what I can share with you right now as we speak is the furloughs to be in line with what we have seen in the past.

Sandeep Shah — Equirus Securities — Analyst

Okay. On the margin, as I understand it has bottomed out, but will it have a U-shaped recovery or will have a U-shaped recovery because U-shape could be the [indecipherable] go to aspiration of a mid-teen, otherwise U-shape may not help us to go through that kind of an aspiration.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Right. I will defer that question to Sachin, Sandeep.

Sachin Zute — Chief Financial Officer

So Sandeep, as I said that there are tracks which we’re running right from improving the commercials, improving the [indecipherable] mix, improving on our recruitment cost, the freshers deployment which will help me to improve my pyramid. These tracks are currently staying and that gives us confidence that in medium term we will be able to recover our margins and we are feeling fairly confident that we will be — we still have the aspiration of reaching mid-teen margins by next year Q2.

Sandeep Shah — Equirus Securities — Analyst

Just a follow-up, Sachin. Even in the near term, despite the seasonal weakness and the furlough, one can say there would be an upward bias to the margin because of the six tracks which we are working you mentioned we are focusing.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Yes, Sandeep.

Sachin Zute — Chief Financial Officer

Yes, Sandeep. That’s exactly how we are currently tracking.

Sandeep Shah — Equirus Securities — Analyst

Okay, thank you, all the best.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Thanks, Sandeep. Thanks.

Operator

Thank you. [Operator Instructions] The next question is from the line of Chirag from [indecipherable] Institutional Equities. Please go ahead.

Chirag — — Analyst

Hello. Sir, I have few questions like in defense technology —

Operator

Chirag, we have disturbance coming from the line, may I request you to speak through the handset?

Chirag — — Analyst

Now it’s audible?

Operator

Yes.

Chirag — — Analyst

Yeah, so sir, I have a few questions, like you mentioned in your earlier remarks that some of the Fortune clients deferring their spending, so as per your conversation with them when you feel that will come back to normal in terms of spend? And also in defense technology other than drone, in which areas we are working?

Ajay Bhutoria — Chief Executive Officer and Managing Director

See, Chirag, so we see softness largely being driven by global macro conditions [indecipherable] largely been driven by what’s happening with the inflationary environment. And the general compression of margins across the globe in the body corporate, right. And this will play out over the course of next couple of quarters. As margins get stretched, right, the natural reaction from the industry is to reduce discretionary spend. And we got impacted because of that especially in the segments that we serve in hi-tech manufacturing and consumer services. This will play out until the inflation situation and the margin situation with the global body corporate stabilizes, right and that will play out over the course of next two to three quarters. So that is what we are tracking and obviously we have put mechanisms that we are not entirely reliant on this turnaround of margin and then we put sales motions in place to increase our pipeline as well, right. So that is what I can share, number one. Number two is, on the emerging side, we have big plays in smart cities, in health tech etc, right, and those will continue to be focused areas for us.

Chirag — — Analyst

And the strategy with respect to domestic business for the next five years?

Ajay Bhutoria — Chief Executive Officer and Managing Director

Yeah, Chirag, good point. We are watching the market very closely. And we will take decision on that as we see fit into our general overall strategy from a service perspective as well as from a geography perspective, but we are watching that carefully.

Chirag — — Analyst

Okay sir, thank you, best of luck.

Operator

Thank you. [Operator Instructions] As there are no further questions, I will now hand the conference over to Mr. Ajay Bhutoria for closing comments.

Ajay Bhutoria — Chief Executive Officer and Managing Director

Thank you, ladies and gentlemen for joining our call today, really appreciate you taking the time and look forward to connecting with you in the next quarterly call if not earlier. Thank you very much. Good morning, good afternoon, good evening to all of you.

Operator

[Operator Closing Remarks]