Zen Technologies Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Orders slipped, confidence held: Domestic orders worth ~₹800 Crores expected from December have not materialized, yet management reiterated its ₹900 Crores FY2025 revenue target and a 50% three-year CAGR, betting on a pipeline at "advanced stages."
• Acquisitions are reshaping the company: Zen is becoming a drone company via Vector Technics (motion control, 13 global patents) and a separate drone acquisition in negotiation, while ARI adds marine simulation to create a complete naval simulator offering.
• Margins compressed on mix and overhead absorption: EBITDA margin fell from 46.95% to 37.69% in 9M, driven by aggressive anti-drone pricing and overheads spread over a lower Q3 turnover; management targets 35% EBITDA and 25% PAT at steady state.
• A US factory is in the works: Zen has permission to invest and is identifying a site; management expects the US to "contribute significantly from FY2027 onwards" but declined to quantify.
• What to watch next quarter: Whether the ~₹800 Crores pipeline converts to orders by Q1 FY2026, the pace of Vector's commercialization, and any clarity on the Bhairav Robotics acquisition deferred to the next call.

Order Pipeline & Revenue Visibility

• The December miss: Management projected a conservative timeline for domestic orders to begin in December, but "even that proved to be very optimistic and still the orders are yet to come." The government was working at a slower pace due to elections, though those issues are said to be resolving.
• Pipeline size: ~₹800 Crores in domestic pipeline, expected to be on the order book before Q2 FY2026, with most orders executed within the same financial year. Export orders are not factored in and described as "a little iffy" but potentially large.
• Order book execution gap: Of the 900+ Cr order book as of September 30, ~300 Cr is AMC. Of the remaining 600 Cr executable, 150 Cr was executed in Q3; the balance 450 Cr will be executed over Q4, Q1 and Q2 of next year, in addition to new orders.
• FY2026 shortfall acknowledged: Management conceded there will be "some shortage given the current situation" for FY2026 but is "very sure that will be filled up in FY2027." The 50% average CAGR over three years remains the stated target, with FY2027 and FY2028 figures looking "very, very encouraging."
• 1400 Crores guidance under review: Management will revise the ₹1,400 Crores revenue guidance as orders come in during Q4 and Q1, with a clearer picture expected by end of Q1.

Ashok Atluri: "Very frankly Dipen what has happened is after 30 years of experience I projected a very, very conservative figure and the team had said that, we will start getting orders much, much earlier. But we took a very, very conservative approach and said, we will start getting from December. But even that proved to be very optimistic and still the orders are yet to come."

Acquisitions & Strategic Bets

Vector Technics (Motion Control)

• What it brings: Indigenized BLDC motor technology for UAVs/robotics and IC-engine based propulsion for drones, with 13 global patents. Vector exports counter-rotating motors and has distribution across Japan, US and UK, expanding into Middle East and Europe.
• Business model: Vector will sell subunits (counter-rotary technology, engines) to support the drone ecosystem in India; it will not make drones itself. Currently at R&D stage, with commercialization expected next year and scaling from 5 to 23 product lines.
• Margin commitment: Management stated margin profile "in no case can be less than 25% PAT" and would be "very surprised" if it fails to improve Zen's overall margin profile.

ARI (Marine Simulation)

• Strategic logic: ARI is the leader in marine simulation; combining its marine simulators with Zen's weapon simulators creates a complete naval simulator offering. The marine simulation business is a big opportunity given global "blue ocean security" focus.
• Margin bridge: ARI's standalone PAT margin is 13-14%, but management argues 25% will come "automatically" when weapon and marine simulators are mixed, and naval simulator margins will be "much much better" than commercial marine.
• Order book addition: At least ₹100 Crores will be added from ARI without naval simulators.

Bhairav Robotics & Drone Acquisition

• Deferred disclosure: Bhairav Robotics was mentioned as an acquisition but detailed discussion was deferred to the next earnings call. A separate drone company acquisition is also in negotiation, distinct from Vector.
• Drone ambition: Zen is "on the way to become a drone company sometime in the future," aiming to be "an absolute manufacturing hub for the world" exporting to North America and Europe. Revenue scale is expected by FY2028, with figures that will "compete with what they are doing in anti-drone and simulator space."

Ashok Atluri: "If we buy something, if we invest in this company, can they create absolutely world-class products or not? If the answer comes no even by investing and waiting for time, they cannot create world-class product, they cannot attain global leadership, we let go off that investment."

Product & Technology

• Vyom Kavach anti-drone system: Launched at Aero India, a four-layer system designed for swarm drones: Layer 1 soft kill (jamming, GPS denial), Layer 2 kamikaze drones, Layer 3 third-party missiles, Layer 4 manufactured/licensed weapons including gatling guns. Zen was the resultant single vendor in both tenders floated by the Indian Armed Forces; 20 companies attended pre-bidding, 6 bid, only 2-3 reached trials.
• Battlefield simulators: Management claims "very few companies in the world" can do complex battlefield simulators combining all equipment simulators in sync, and Zen "can do it very well." One opportunity was described as a potential "black swan positive event" that may materialize in FY2027 if not FY2026.
• Direct energy/EMP research: Zen is conducting direct energy experiments in-house along with CHESS (DRDO's direct energy unit). EMP, railgun and direct energy are "on the horizon but not yet completely proven."
• Product mix margin drag: Anti-drone systems were bid aggressively as an entry strategy and carry lower margins than simulators, explaining why trailing 12-month profit growth (92%) lagged sales growth (100%). Simulators have "very good margins."

Ashok Atluri: "I do not think of any company that can do in the world, the kind of all the equipment simulators put together, working in sync to trying to simulate the war is something that Zen can do very well."

Margins & Financials

• Q3 margin mechanics: Overheads remained same in absolute terms but as a percentage of lower turnover (₹141 Cr vs ₹241 Cr), expenses rose from 15% to 23%, an 8-percentage-point delta. This 8% is compensated by interest income; on a 9-month basis, operational EBITDA is 35%, which management says is on track.
• Employee cost decline: The sequential drop in manpower cost (₹14 Cr to ₹12.10 Cr) reflects a 70-80% reduction in turnover; contractual employees were reduced by ₹2 Cr, while permanent employee cost remained the same.
• Full-year guidance: Management expects FY2025 EBITDA above 35% and PAT above 25%, with Q4 turnover and EBITDA both increasing.

International Expansion

• US factory: Zen has taken permission to invest in the US and is identifying a site with the new administration in place. Management expects the US to "contribute significantly from FY2027 onwards" but declined to put a figure on it, calling it "too premature." Numbers are described as "very large," with better colour expected by mid-next year for FY2027 figures.
• US competitive positioning: Management argued that Indian anti-drone systems are better than American alternatives, and the Indian government will not buy what is already available domestically.
• Goa facility: Waiting for government permission; construction was supposed to start by February 15 but there is a delay. Blueprint is ready, and management hopes to operationalize it before the end of this calendar year.

Ashok Atluri: "I think the US will contribute significantly from FY2027 onwards. I am very sure about that."

Market Opportunity & Competitive Position

• Addressable market expansion: The addressable market has grown "tremendously" over the past few months, making the 50% CAGR target over three years achievable even if FY2026 falls short. When asked to quantify the total addressable market for anti-drone and simulators combined, management declined: "I really do not want to tell because that will sound obscene in this forum."
• Government procurement dynamics: Orders do not come from exhibitions because government procurement is extremely process-driven; visitors explore technologies, then float tenders. Management expects the government to accelerate procurement and place orders "sooner than later," with orders coming to Indian companies "in large numbers."
• Naval simulator upside: Once naval simulators start coming into place, the business could "double, triple, or something," with the few hundred Crores from this collaboration being key to reaching the next level.

Ashok Atluri: "I have never been more optimistic about the defence sector as such. I think the next three years will blow our minds away."

Guidance & Commitments

Key Metrics