Zen Technologies Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Revenue on track, margin under pressure: FY25 revenue will "definitely exceed" ₹900 Crores, but H1 gross margin fell to 50% as the company absorbed higher R&D costs and accommodated evolving customer requirements on new products.
• The US bet is now a concrete plan: A ~₹80 Crore US manufacturing facility, designed to meet the 51% Make in America requirement, is targeted for FY2026, with management citing a multi-year technology lead in containerized simulators as its edge.
• Order pipeline signals ambition, not backlog: The ₹3,500 Crore pipeline is expected to "explode" to multiples, but only ₹1,200 Crores represents decided orders; the rest is submitted bids, and conversion is an 18-month cycle.
• Product strategy is a portfolio of asymmetric bets: From the world's lightest RCWS to robotic dogs, Zen runs many small R&D wagers where failure costs little but success opens enormous markets; hard-kill anti-drone demand is now "dramatically increasing."
• What to watch next quarter: Whether the ₹100 Crores of orders expected in late Q3/Q4 materialize, the pace of receivables conversion from the elevated ₹411 Crores, and any concrete acquisition announcement within the stated one-year timeline.

US Market Entry

• Why now: The Trump administration's expected emphasis on Make in America, combined with what management describes as a 10-year lead in containerized tank simulators over US plans, has given Zen confidence to commit. At a recent US simulation exhibition, officials were "flabbergasted" that the Indian Army had used Zen's containerized simulators for 12 years while the US was planning to build them in the next five.
• The operating model: Zen will replicate its India approach: outsource ~85% of manufacturing to a vetted local supply chain, keep fixed costs minimal, and do final integration, assembly and software in-house. The US facility will serve as a hub for North and South America, and eventually NATO countries and Europe.
• Cost and timeline: Capex is estimated at ~₹80 Crores, likely for FY2026. Management expects an eight-month setup period to identify and build the supply chain. Large orders are not expected until FY2027, though some may begin in FY2026.
• Revenue ambition: Management offered a wide range for US revenue contribution by FY2027, from 10–15% to as much as 50%, calling it a "difficult question to answer."
• Competitive posture: Management is direct about its view of the competitive landscape, stating it does not think American products are better, having seen them at various exhibitions.

Ashok Atluri: "They said, you have containerized simulators and in India has been using for the last 10 years and they are planning to use in the next five years, so, these kind of, so we felt that, this has given us very good confidence and we have been seeing other simulators also in the US, and we think that, we have a fair chance, very, very good shot at becoming a dominant player in the army simulator there."

Product & Technology Portfolio

• Anti-drone systems: Zen claims a top-tier position in recent market surveys. The system spans soft-kill and hard-kill (kinetic) capabilities, with demand for hard-kill "dramatically increasing." The business model integrates customers' existing weapon systems via an adapter and Zen's RCWS, dramatically reducing their cost. Management notes that with hard-kill added, the system can create an Iron Dome-like capability.
• Simulators: The core legacy business, now two generations ahead of products exhibited in 2021. Containerized tank simulators are the flagship US entry point. Competitors globally include Thales, Saab, Cubic Defense Systems and Rheinmetall Germany; in India, Bharat Electronics Limited.
• New product launches: The ultralight remote control weapon station, claimed to be the world's lightest and man-portable (previously requiring a crane), was launched this quarter. The AI Turing acquisition (RCWS) is becoming a sought-after equipment across various armies.
• Asymmetric R&D bets: The company maintains a portfolio of products where R&D was done but not taken to market; these are small investments that, if they fail, cost little, but if they succeed, generate enormous revenues. Prahasta (robotic dog) is undergoing more R&D to meet requirements; Barbarik has been tested by the Army and found very useful, with requirements expected in the next few months.
• Autonomous systems positioning: Management does not see autonomous tanks being fielded for at least 5–6 years, but Zen is getting into autonomous systems (RCWS, robotics) to take advantage of the trend when it materializes. Even autonomous systems will require training, preserving the simulation business.

Ashok Atluri: "Here we have an adapter for the weapon system, a remote control weapon station, we have a camera that is hooked down to that and we have an anti-drone system, so their costs come down dramatically and I think there is a huge, huge demand for these kind of hardware system where we are not pushing the weapon system and we are saying give me your weapon system and we will integrate with our anti-drone system."

Financial Performance & Margins

• Gross margin compression: H1 FY2025 gross margin was 50%, below typical levels. Three drivers: higher raw material cost from increased R&D expenditure allocation, a change in geography mix (exports, which carry better margins, will be significantly higher in H2), and a slight change in product mix within simulators. Labor and overhead costs were reduced substantially in execution, partly offsetting the pressure.
• Operational EBITDA held: Despite the lower gross margin, operational EBITDA was maintained at 37% in H1, above the 35% guidance, helped by scale benefits. Management reiterated its commitment to strive for 35% EBITDA and 25% PAT margins.
• Working capital stretched: Receivables increased to ₹411 Crores, with 85% (₹350 Crores) below 180 days. The working capital cycle increased to ~200 days in H1 FY25 from ~148 days at March 31, 2024, driven by higher absolute receivables from higher H1 revenue. Management expects significant realization in the current quarter to bring the cycle down to 160–170 days by year-end.
• Cash allocation from QIP: Of the ₹1,000 Crores raised (subscribed more than five times), ~₹400 Crores is earmarked for acquisitions, less than ₹100 Crores for capex, and ~₹300–400 Crores for working capital requirements.
• Revenue phasing caution: Management explicitly warns against quarter-on-quarter projections for defense companies, calling them "dangerous" due to uneven order execution; year-on-year growth is the recommended test.

Order Pipeline & Growth Outlook

• Pipeline composition: The ₹3,500 Crore pipeline is a mix of simulators, training systems and anti-drone systems. Of this, ₹2,000 Crores represents submitted bids and ₹1,200 Crores is already decided orders. Management declined to bifurcate the pipeline between anti-drone and simulators.
• Conversion reality: The ₹1,200 Crores is not a conversion ratio from the pipeline; it represents orders already decided. Management expects an 80%+ conversion rate on the pipeline, with a typical order conversion cycle of 18 months unless it is an emergency procurement.
• Near-term order expectation: About ₹100 Crores worth of orders are expected towards the end of Q3 and in Q4.
• The 50% CAGR commitment: Management is confident in an average CAGR of 50% over the next three years, with the order book needing to be upwards of ₹2,000 Crores to achieve that. A bit of new product integration (anti-drone with RCWS) is factored into this growth, but independent sales from new products and acquisitions are not.
• Navy and Air Force expansion: The company is looking to expand into Navy and Air Force segments both organically and through acquisitions, expecting at least a couple of billion dollars worth of business in the next two years. Orders are expected to start coming in FY2026.
• No slowdown signal: Management sees no slowdown in Indian defense orders; there may be some delay but no elimination, with the government moving forward.

Ashok Atluri: "I feel very confident that world will be a much peaceful place now onwards, but again, people will prepare for war."

Acquisitions & Capital Allocation

• Target profile: Zen is looking at both Indian and overseas targets, with a typical size of ₹100 to 300 Crores, though management will not restrict itself from larger acquisitions if they make strategic sense. The focus is on companies with a competent technical team and considerable IP, which Zen will focus on one or two products with large markets and little competition.
• Acquisition philosophy: Management is willing to put in significant money and accept short-term EPS dilution. The stated approach is to let acquired teams focus narrowly rather than spreading them thin. Revenue impact from acquisitions is expected to be in line with current Zen parameters for revenue/fixed asset turnover and return on equity/capital employed.
• Timeline: Acquisitions have been given a one-year timeline; management hopes to close within that period.
• Product recall incident: One product recall occurred this period. Management characterized the customer as "unreasonable" and made a deliberate decision to "fire" them, stating the product was proven and used by many other customers with no deficiency. The order size was a few Crores.

Ashok Atluri: "I am not an MBA and I am not an MBA from Harvard so that should be derisk to a large extent, so I will be unfettered by any case studies we are looking at."

Guidance & Commitments

Key Metrics