ZEN TECHNOLOGIES

(NSE CODE:  ZENTEC, BSE Code: 533339) (CMP: Rs.63.70) (FV: Rs.1)

Zen Technologies was incorporated in the year 1993 with an aim to develop state-of-the-art training simulators for weapons and allied defence equipment. The company went public in the year 2000. Company has main focus on defence and especially on training simulator with key emphasize on products which can substitute imports. The company started with 3 products and currently has 32 products, though bulk of current revenue comes from handful of products (5-6 products).

Zen, over the years, has developed expertise in designing, developing and manufacturing various types of simulators. The products developed in-house not only meet all qualitative standards but also are cost-effective.

Customers of the company are located across the length and breadth of the country. Its main customers are Defence, Services, State Police forces, Para Military forces and the Navy of a South-East Asian country.

They have invested a lot in R&D and Intellectual property (IP) ownership is with the company. They don’t indulge in outsourcing software or don’t manufacture for others. The software portion of product is completely in-house while hardware they get it manufactured outside. The goal of the company is to develop world-class simulators. The company attaches special importance to its R and D activities. The R and D division has sophisticated software tools and skilled manpower.

Zen is at the forefront of applying new technologies and developing new products. It is actively involved in indigenization of technologies, which is beneficial to Indian Security Forces. It was the first Indian company to commercialize PC-based visual simulation technology for training simulators. Now Zen is the leader, offering Firearms, Tank, Driving, Mining and Unmanned Aerial Vehicle (UAV) simulators.

The R and D unit at B-42 Industrial Estate, Sanathnagar (Hyderabad) is recognized by the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India.

Future Outlook

• Currently majority of revenue comes from Defence (80-90%) though they are now coming up with products to cater to central arm/state police force. Now the company will also focus on exports to reduce dependency on the Indian Armed forces.

• At present company has 200cr order of Tank simulators in advanced stage of commercial negotiations, while 300cr repeat order also expected within 8 months.   They are also eyeing key export orders.  Historically there have been delays in fulfilling the order, so sales were impacted but now the management don’t want any such embarrassment.

• The management is expecting lifecycle of order awards to decrease from 36months to 18months, if this happens it will be very positive for the company but the proposal is in nascent stage

• Management has also come up with new products like (Combat training sim, UAV sim, Driving sim, AGL sim, Infantry weapon sim etc.) and sees an opportunity size of 6000-7000cr as market potential in the next 4 years. AMC revenue is also expected to double from current Rs 15-16cr to 30-32cr in next few months which may take care of fixed cost.

CNBC AWAAZ Interview with Zen Technologies CMD, Ashok Atluri

Key Risks

• The major risk associated is delays in order confirmation.

• Sales have been extremely lumpy in the past.

Shareholding

Promoters holding stand at 59.44%, HNI’s like Mukul Agrawal, Ashish Kacholia, Chandra Sekhar Moturu, Ravi Kamepalli have cornered 11.10%, Body Corporates hold 6.41%, so only 23% is left with the public.

Financial Snapshot

If you see last year FY 2016 for sales of Rs. 52 crores their EPS was near zero.  This is because Rs. 50 crores is their breakeven point.  In 2012 when they had achieved a turnover of 100 odd crores and their profits were 31.57 crores, So basically for the incremental sales above 50 crores they earned 31 crores in profit so for each incremental rupee of sales above Rs 50 crores they earned 60 % in profits, this is classical operating leverage. Now with the above projected order book their profits should form a classical J curve.  So suppose they do clock 500 crores of turnover over the next one year 60 % of the same will directly flow into profits which comes to 300 crores giving an EPS of above 30.  So even a decent PE of 15 will take the price of the stock to Rs. 450. It has been a regular dividend-paying company.