Zen Technologies Ltd Q3 FY2024 Concall Summary

Key Takeaways

• A quarter that printed the thesis: Revenue grew 194% YoY and EBITDA margin hit 47%, both well above internal targets, as the simulator order book converted and operating leverage kicked in.
• The order book anchors the next leg: At ₹1,434 cr, with ~₹1,150 cr of equipment orders set to execute by FY25, management committed to at least ₹900 cr revenue in FY25 and a 50% CAGR from FY26 to FY28.
• Anti-drone is the second engine: Zen was the resultant single vendor in both large government tenders so far, and management aims to be #1 or #2 globally in anti-drone systems within 3-5 years, backed by heavy R&D investment.
• Acquisition talk is an option, not a plan: The ₹1,000 cr enabling resolution is for a synergistic target that does not yet exist; management stressed it is "very, very conservative" and will not raise unless a blockbuster deal is identified.
• What to watch next quarter: Whether the order inflow pace picks up from Q3's muted ₹129 cr, any concrete acquisition target emerging, and the trajectory of the export push now that management says it is entering foreign markets "in a very, very serious manner."

Financial Performance

• Top-line explosion: Q3 revenue grew 194% YoY and 9M revenue grew 237% YoY, driven entirely by execution of the large simulator order book. Management revised the FY24 target to at least ₹450 cr, down slightly from an earlier 450-500 cr range.
• Margins ran hot: EBITDA margin reached 47% in Q3 (vs 29% a year ago) and 47% in 9M (vs 34%), while PAT margin hit 32% in Q3 (vs 23%). The internal EBITDA target is 35%, so Q3 overshot materially.
• Why margins jump around: Simulators carry better margins than other products, so the mix in any given quarter swings profitability. Management expects the average to settle at 35% EBITDA and 25% PAT over time.
• Working capital tightened: The working capital cycle improved to 93 days, helped by better management of inventory, receivables, and higher customer advances.
• Tax rate is temporarily high: The ~30% effective rate reflects higher MAT credit utilization in the first nine months; the actual tax bracket is about 29.12% including surcharge.

Ashok Atluri: "One thing is we are very, very cost conscious, we have a cost mindset which will put even the most miser to shine."

Order Book & Revenue Visibility

• The book is the story: The order book stood at ₹1,434 cr as of December 31, 2023, with equipment orders of ~₹1,150 cr expected to execute by FY25. Management expects the order book at the end of FY25 to be stronger than FY24.
• Q3 inflow was light: Orders of ₹129 cr were well below the ₹500-600 cr bid pipeline that analysts referenced. Management said order pace varies quarter-to-quarter and that FY24 orders are "almost through," without explaining the specific gap.
• The revenue bridge: FY24 revenue of at least ₹450 cr, FY25 of at least ₹900 cr, and a 50% CAGR from FY26 to FY28, implying a FY28 turnover of almost ₹3,000 cr. These targets are organic and not linked to any acquisition.
• Mix ambition: Management targets a 50:50 split between anti-drone systems and simulators, and at least 50:50 between exports and domestic, with exports expected to overtake domestic by FY28.

Ashok Atluri: "By the way also a third-party like if you see Bharatshakti Conclave, the chief of army has said in many occasions that simulator training is absolutely important for us and it has just started. So, the 1,000 crores order that we have is just a starting tip of the iceberg."

Competitive Position & Anti-Drone Ambition

• Claimed #1 in land simulators globally: Management says Zen has competed against and beaten SA, Palace, Cubic and others, and that India is now the number one country in land simulators, with Zen as the major reason.
• Anti-drone leadership validated by tenders: Zen was the resultant single vendor for both large government anti-drone tenders published so far. Management aims to be #1 or #2 in the world in anti-drone systems in the next 3-5 years and will invest heavily in R&D regardless of winning or losing individual tenders.
• DRDO competition is indirect: When asked whether DRDO delegating anti-drone work to Tata Advanced and L&T poses a threat, management said DRDO's technology is two years old, Zen competes and wins, and DRDO's focus helps Zen indirectly by building the category. The question of whether Tata Advanced or L&T pose a direct competitive threat was not addressed.
• The macro tailwind: The government's post-2015 focus on IDDM and Make-II categories, plus the worldwide picture of wars (Armenia-Azerbaijan, Ukraine-Russia, Israel), has made drones and counter-drone systems critical.

Ashok Atluri: "don't look at my PR releases don't look at my statements that I make but look at the tender that the government is publishing and who has won those tenders"

Exports & Manufacturing

• Why India wins exports: India is seen as a more reliable partner than NATO countries for Africa, the Middle East, CIS countries and Southeast Asia. Once quality is proven, these regions prefer buying from India. Political reasons limit sales to NATO countries themselves.
• The Goa hedge: The ₹50 cr Goa facility is being built to derisk geographical concentration, since everything is currently in Hyderabad. It serves as a backup for export customers concerned about a single-location shutdown and will complement, not replace, Hyderabad.
• Asset-light manufacturing: 85% or more of manufacturing is outsourced; Zen has a robust supply chain and a team monitoring and expanding it, so growth will be absorbed through the supply chain rather than capex.

Capital Allocation & Acquisitions

• The QIP is a tool, not a plan: The board passed an enabling resolution to raise up to ₹1,000 cr, but management was explicit that it will only be activated if a synergistic acquisition target is identified. "Otherwise, we may not do this raise at all."
• Acquisition philosophy is deeply conservative: Management believes 80-90% of acquisitions go bad and will "retest assumptions" and be "very, very careful with shareholders' money." If an acquisition happens, it will be a "blockbuster."
• No target in hand: Management is evaluating multiple companies globally but has no target identified. The maximum acquisition size is ~₹500 cr, though this is not a hard limit. Smaller deals may be funded with debt only; larger ones with a combination of debt and equity.
• Promoter stake sale was non-core: Non-core promoters sold ~2% to Tata AIG after 23 years, bringing in a strong institutional investor. Management did not address whether this signals a tie-up with Tata Advanced.

Ashok Atluri: "I'm very, very worry about acquisition because I know that almost 80% to 90% of the acquisitions go bad. So, I'm very, very conservative about it and we'll ensure that we will really retest, we will be very, very careful with the shareholders money"

IP, R&D & Talent

• IP as a hidden asset: Management urged investors to view Zen as an IP play, since R&D costs are written off but create a hidden asset in the form of patents and proprietary technology. Fifteen patents were awarded in the current year, filed in India, the US and Europe.
• R&D spend to normalize: R&D spend is currently about 5% of sales and is expected to return to its old percentage as revenue scales.
• Talent initiatives underway: HR policies are being revamped to attract technical manpower, and an ESOP plan has been initiated to reward dedicated employees. ESOPs will continue.

Ashok Atluri: "look at Zen as an IP play because there is so much hidden asset in the IP because what happens is whenever there is a register, when we ever do R&D, we write-off those costs, but in those costs there is a hidden asset there, IP being created"

Guidance & Commitments

Key Metrics