Zen Technologies Ltd Q2 FY2024 Concall Summary

Key Takeaways

• H1 beats margin guidance, Q4 will dominate revenue: H1 EBITDA hit 44% against a 35% floor, but revenue is heavily back-loaded; management urges investors to judge defense companies year-on-year, not quarter-on-quarter.
• Order book de-risks FY25: An equipment order book of ₹1,200 crores sets up ~₹900–₹950 crores of execution in FY25, putting the ₹1,000 crore topline aspiration within reach from existing orders alone.
• Exports are the growth engine: A ₹340 crore export order this quarter and a new Armenia office signal that the export pipeline is converting; management expects exports to match or exceed domestic revenue going forward.
• The anti-drone bet is scaling: A ₹160 crore domestic anti-drone order landed in July, and R&D spend is unconstrained; management aims to become a globally important player in the space.
• What to watch next quarter: Whether the ₹500–₹600 crore bidding pipeline converts into firm orders by Q4, the pace of export order execution, and any inorganic move in electronic warfare or simulation.

Revenue Phasing & Order Book

• Q4 is the anchor: Revenue is not divisible by four quarters; execution on some orders started earlier than planned, but Q4 will still be the heaviest quarter. This lumpiness is structural for government-oriented defense companies.
• Q-o-Q dip explained: The sequential dip is not an execution delay; orders received as late as March-end and June began execution only from Q2 onward. Management strongly recommends focusing on year-on-year comparisons.
• Order book breakdown: Of the ₹1,200 crore equipment order book, ~₹300 crores executes in FY24 and ~₹900–₹950 crores in FY25. AMC is not placed upfront for anti-drone and export orders; the intention is to place it post-warranty after two years.
• New wins this quarter: ₹924 crores in new orders, comprising a ₹160 crore anti-drone order (July) and a ₹340 crore export order mixing training equipment and anti-drone systems. An additional ₹84 crore tank live simulation order (net of taxes) opened H2.
• Pipeline visibility: The company is bidding for ~₹500–₹600 crores of orders, with major inflows expected toward Q4 FY24 and Q1 FY25. A very large pipeline is developing for FY26 and FY27 but has not yet crystallized.
• Export order surety: Export orders carry a 30% advance, the customer is providing feedback, product models are being built, and no frivolous cancellation clause exists. All export orders are expected to be executed before FY25.

Atluri: "Earlier when you used to went they used to laugh in India the largest importer what are you saying that you will sell something to us, but now that's no longer the case we are respected."

Margin Structure & Costs

• H1 EBITDA at 44%: This is above the guided 35% floor; management attributes the outperformance to product mix and reiterates that 35% is a minimum, not a ceiling. Simulators carry better margins than anti-drone systems.
• Gross margin steady: Expected to hold at 65%–70% with no significant pressure foreseen.
• Employee cost trajectory: Absolute employee cost will rise but as a percentage of revenue will be much lower than current levels; the company is adapting its structure to serve the market.
• Other expenses: The major expense is marketing, which is variable in nature.
• R&D treatment: R&D expenditure is written off in the period it occurs, not capitalized, reflecting a conservative accounting approach.
• Working capital turnaround: Days improved sharply from 225 to 128, driven by inventory days falling from 91 to 42 and receivables from 150 to 96. The company expects to stay in a 120–140 day band, aided by 30% advances on export orders.

Atluri: "We guarantee a minimum of 35% EBITDA, but given the uncertainty of the supply chain, all that there is a possibility that the cost of materials may go up with it. But I mean we are very proved friendly company if there is something more than 35% we would be very, very happy about it and so will the shareholders here."

Export Strategy & Geopolitical Tailwind

• Demand driver: Management argues that the inability of even the world's most secure countries to protect their borders is pushing training to the top of other nations' priority lists, directly benefiting Zen's simulator business.
• Geographic expansion: An office is opening in Armenia to serve as a hub for CIS countries, where management expects significant business. The company is already active in Dubai and sees Saudi Arabia as a very good long-term bet for Middle East operations.
• Revenue mix ambition: Management expects a 50-50 split between domestic and export, or a skew toward exports being higher. It declined to specify a target mix between simulators and anti-drone systems, saying it welcomes any combination as long as the absolute number is higher.
• Currency approach: Export orders are in USD; the company does no currency hedging and takes no aggressive profit on currency movements.

Anti-Drone Systems & R&D

• Scaling ambition: Management aims to become a globally important player in anti-drone systems and says no effort or expense is being spared on R&D. New features will be added on a regular basis.
• Simulator development speed: Most simulators can be developed within six months, complex systems up to twelve months; the underlying libraries are generic and have been built over decades. Zen captures the information required for simulation just by looking at the equipment, without needing OEM technology transfer.

Atluri: "For the training point of view whatever is required to be simulated we capture the information just by looking at the equipment, we don't need the in-arts of the thing because those libraries have been developed over a period of decades with us, they are there with us."

Manufacturing Model & CAPEX

• Asset-light by design: R&D, engineering, after-sales service and AMC are fully in-house; manufacturing is deliberately outsourced to capable vendors in Hyderabad. CAPEX needed for ₹1,000 crore revenue is very minimal, perhaps ₹10–20 crores for physical infrastructure and jigs/fixtures.
• Supply chain resilience: Currently no stress; the company is pre-ordering critical long-lead items to mitigate chip and component risks from geopolitical conflicts.
• Inorganic appetite: Restricted to electronic warfare and simulation; the goal is to absorb technology and build next-generation products, not simply manufacture for someone else. Opportunities are mostly international but also domestic; a deal may not happen this year.

Competitive Position & Long-Term Vision

• Self-referencing competition: Management states Zen is its own competition and focuses on being better than yesterday. The external environment is shifting in its favor as IDDM (Indigenously Designed, Developed and Manufactured) and R&D are now appreciated.
• Orbital shift thesis: The company believes it is in its orbit and expects another orbital shift maybe a year from now, driven by the changing appreciation for indigenous R&D. Growth is expected to continue for the next three to four years, putting the company in a "different league altogether."
• Five-year aspiration: Management would be disappointed with only ₹5,000 crores five years from now, saying it should be much higher.

Atluri: "We are our own competition, and we keep seeing that we are better than yesterday all the time."

Guidance & Commitments

Key Metrics