Zen Technologies: Pioneering the Future of Defense Training and Security (Updated)
IP led growth in a niche defense Segment
India is committed to bolstering its defense capabilities and exports. One it is essential for a country of the size of India with 140 crore people to be self-reliant and second when the whole world is facing crisis after crisis from COVID to the Ukraine-Russia crises to the Israel-Palestine conflict, and what not to come….dependence is not an option. Plus India may provide cost-effective alternatives to the world.
Not only does India have one of the lowest costs of production but it also has its way of innovation where it does more with less. The green shoots of India’s growing export of defense are visible with exports of 21,000 crore rupees in FY 2024. India’s focus on increasing defense exports contributes to the global market and strengthens its position as a key player in the international defense industry.
The export target for 2024-25 is USD 5 billion i.e. c. 42000 cr double the FY24 exports.
The industry tailwind is huge 🚀🚀
Zen Technologies: Leader in Simulation Solutions
The company in focus today is Zen Technologies:
Founded in 1993, it provides solutions in Combat Training and Counter-Drone applications.
Ist Generational Entrepreneurs, “Atluri Brothers” family-owned business Management
It caters to the Indian armed forces, state police, and paramilitary forces. Further, it exports to the world
Headquartered in Hyderabad, the company has offices in USA and UAE.
It is a system engineering company with skill sets in electronics, optics, system engineering, mechanical engineering, and software.
Combat Training Solutions
It manufactures an array of training simulators that create immersive and realistic environments that enhance the readiness and effectiveness of armed forces.
Their portfolio includes:
Live Fire Simulators: These systems provide realistic training scenarios for soldiers, allowing them to practice marksmanship, tactics, and teamwork in a safe environment.
Live Instrumented Training Systems: These combine real-world equipment with instrumentation to capture data during training exercises. This data helps evaluate performance and identify areas for improvement.
Virtual and Constructive Training Systems: offers immersive virtual environments and constructive simulations that simulate combat situations, enabling collective training and mission planning.
The products range from containerized indoor shooting ranges to the sophisticated Combat Training Centre (CTC) providing a platform for soldiers to hone their skills. The company’s flagship product, the Tank Simulator, is a marvel of virtual engineering, providing a lifelike experience of operating armored vehicles. The Smart Target System (LOMAH) and the CornerShot Weapon System (TRIKAAL) are other notable offerings that enhance the tactical capabilities of defense personnel.
Management claims to have a 90% strike rate in winning orders in the domestic market. They seem to have an edge in the emerging opportunities. IMO, these simulators are low-cost, high-impact investments in defence preparedness.
Counter-Drone Solutions
In response to the growing threat posed by unmanned aerial vehicles (UAVs), Zen Technologies has developed counter-drone solutions. Their Anti Drone System (CUAS) is a multi-layered architecture designed to detect, classify, track, and neutralize drones through a combination of passive surveillance, camera sensors, and jamming communications. Their anti-drone solutions include:
Detection Systems: develops state-of-the-art sensors and radars capable of detecting unauthorized drones in restricted airspace.
Jamming Systems: To neutralize rogue drones, the company offers jamming devices that disrupt communication between the drone and its operator.
Interception Systems: Design systems that physically intercept and capture unauthorized drones, preventing potential harm.
Again, an emerging theme vital for defence preparedness.
AMC
Zen’s recurring revenue stream comes from AMC contracts. They currently generate around ₹40 crores annually from AMC and aim to achieve ₹150 crores by 2027-28.
The focus on AMC ensures profitability even in the absence of new equipment orders
AMC generates 120% revenues over the cost of product over 15 years.
Innovation and Impact
R&D facility in Hyderabad, endorsed by the Ministry of Science and Technology. ZEN also boasts 150+ filed patents, with nearly 70 already granted. Notably, the company is self-reliant and does not rely on imports for its supply chain.
R&D spends are trending upwards over the years…
My best guess would be an IP-led … will enhance the existing solutions
What Next:
Management guidance of 900 cr revenue in FY 25 i.e. 2X of FY24 revenue.
Further, guided of 1200 order inflow in FY 25, mostly in Q3/Q4 FY25
Can pursue organic growth as well….has an enabling resolution to raise 1000 cr…
The company on the one hand has a business (simulator) that is a crucial component in training - helps cut the cost of training and time, the second line of business (anti-drone) is a strategic requirement for the defence of borders and critical infrastructure. A revamped Agniveer induction will also require appropriate training requiring simulators.
If the company performs as per management guidance, doubling of revenue will lead to at least double the profits if not more i.e. shelving next year's valuations to half. I will not be focusing too much on PE multiples. Part of the reason is (1) I am not claiming to be a value investor (2) I want to go where the puck is moving (3) I reserve and deserve the right to be wrong (4) follow the trend and have SL in place. Order inflow, execution, and working capital days seem to be key monitorable in this business
Remember, it is a lumpy business
Business Update - 15 July 2024 (Product Unveil)
Zen had in its Q4FY2024 Concall indicated the launch of new products.
"These innovations represent a significant advancement in autonomous defense operations. We believe the launch of these products will raise awareness around the need to integrate advanced robotics into combat and reconnaissance missions. Our self-funded products will further enable Zen to offer an expanded range of cutting-edge technologies to both current and prospective clients.” - Ashok Atluri, Chairman and MD, Zen Technologies
Notes from Initiating Coverage by Motilal Oswal
The addressable markets for simulators and counter-drones in India estimated at Rs. 14,000 Cr and Rs. 12,000 Cr respectively over the next five years. Zen has significant market share in these segments, with just 2-3 players in the defense simulator market and 5-6 players in the counter-drone market.
Estimated order inflow CAGR of 37% over the next three years. Projected revenue/EBITDA/PAT CAGR of 63%/57%/56% over FY24-27.
Indian simulator market is likely to grow at a 10% CAGR driven by the government's increased focus on virtual training. Additionally, there is an increased focus on the Agnipath Pravesh Yojana (APY), which would also drive demand for faster training of new recruits. Further, the counter-drone market is being driven by the requirement to install anti-drone systems across the borders.
Results Update - Q1 FY2024-25 Results
Blockbuster results. 92% revenue growth, 62% EBITDA growth and 63% PAT growth (YoY)
Muted Quarter in terms of order wins
Reiterated guidance intact
Our strong balance sheet and ongoing investment in R&D ensure we remain at the cutting edge of technology, ready to meet evolving customer needs. We are excited about the future and confident in meeting our guidance of ₹900 crores of turnover in the current financial year. - Press Release
Update
*****
Invest in yourself…. be a learning machine
These communities have helped me a lot in learning the nuances of investing. Why not check them out? - Join the community of learners.
Supporting my work
This Substack will never be paywalled. I don’t want to accept voluntary payments for future unknown work.
But if you got this far, chances are you find my writing valuable. So please spread the word! Sharing, liking, and commenting all help spread the word!
Disclaimer: I am not SEBI registered. The information provided here is for educational purposes only. This is not a buy or sell advice. I will not be responsible for any of your profit/loss based on the above information. Consult your financial advisor before making any decisions.
Thanks for reading Pankaj’s Substack! Subscribe for free to receive new posts and support my work.