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Strong execution

ZEN reported 92%/56%/57% YoY increase in revenue/EBITDA/PAT in 1QFY25, driven by an order book of INR11.6b. EBITDA margin remained strong at 40% as the company continued to benefit from backward integration and control over supply chain. As a result, PAT margin came in at 29.2%. Order inflows will start ramping up from 2HFY25 onward. We marginally revise our estimates to factor in the 1Q performance and maintain BUY rating ZEN with a TP of INR1,820, based on 40x Jun’26E EPS (vs. INR1,775 earlier). The current valuation of ZEN is still cheaper than that of other comparable companies in the private defense sector and ZEN has the advantage of a faster CAGR, stronger margins and reasonable NWC. Maintain BUY.

Robust 1Q results

Revenue grew 92% YoY/87% QoQ to INR2.5b, led by robust execution of the opening order book of INR14b. EBITDA came in at INR1b, up 56% YoY/129% QoQ. EBITDA margin contracted ~960bp YoY to 40%; however, it was down only 60bp vs. the FY24 level and well within the management’s guidance. PAT grew 57% YoY to INR742m, with margin at 29.2%. The order book stood at INR11.6b (+113% YoY). 1Q saw nil order inflow as decision-making was delayed due to elections. Order inflows will start ramping up from 3QFY25 onward.

Order inflow visibility will emerge in coming months

1Q saw nil order inflow owing to elections. However, inflows are likely to ramp up in the coming quarters from both domestic and international geographies. ZEN is already working on various products like Hawkeye anti-drone system, Barbarik URCWS, Prahasta automated quadruped, and Sthir Stab 640 stabilized sight and platforms like tactical simulator, weapon-training simulators, advanced counter drone systems, which will see improved inflows and revenue traction ahead. We expect the new products for anti-drone system to boost revenue and order inflows from FY26 onward. We currently estimate order inflows of INR18b/INR25b/INR35b for FY25/FY26/FY27.

Export inflow and revenue were nil during the quarter

Export inflow and revenues were also nil during the quarter, as the existing order book in exports has not reached the revenue recognition stage. Currently, ZEN has a presence in markets such as Nigeria, Qatar, Malaysia, UAE, Kenya and Egypt. Its export order book stands at INR4.4b diversified across simulators (INR1.6b) and anti-drone systems (INR2.8b). With an increased focus on exports, the company intends to increase the revenue share of exports to 35% by FY28.

Zen is ideally positioned to capture a healthy market share

In the simulator market, ZEN competes with 4-5 players and managed a market share of more than 80% during FY24. In the anti-drone market, ZEN competes with 5-6 players, but it has an edge over others in terms of backward integration. ZEN has a portfolio of over 40 products designed and developed indigenously, ranging from live fire, live instrumented, virtual, and constructive training systems for individual and collective training, as well as counter-drone solutions. Its extensive product portfolio is also complemented by a services division that provides after-sales service, warranty, and AMC, et al. ZEN also boasts 150+ filed patents, with nearly 70 already granted. We thus expect it to be ideally positioned to capture a decent share in the upcoming orders on simulators and anti-drone segment.

Financial outlook

We expect a CAGR of 63%/57%/57% in revenue/EBITDA/PAT during FY24-27. This growth will be led by: 1) order inflow growth of 37%, due to a strong pipeline across simulators and anti-drones, 2) EBITDA margin of 37.5%/37%/37% for FY25/FY26/ FY27, and 3) enhanced control over working capital due to improved collections. With a substantial revenue growth, healthy margins, and stable working capital, we expect ZEN’s RoE and RoCE to improve to 38% and 38% by FY27, respectively.

Key risks and concerns

Any slowdown in procurement from the defense industry, especially for simulators, can expose the company to the risk of reduced order inflows and hinder its growth. ZEN is also exposed to foreign currency risks for its export revenue. High working capital can also pose risks to cash flows, as ZEN’s working capital has remained high historically due to issues related to high debtors and high inventories. This is likely to come down due to improved collections and lower inventory, as per the management. However, any delays in the same can affect cash flows in FY25/FY26

Valuation and view

We value the stock at 40x Jun’26E EPS. We marginally revise our estimates to factor in the 1Q performance and maintain a BUY rating on the stock with a revised TP of INR1,820 (vs. INR1,775 earlier). We expect the company to: 1) grow at a much faster pace than the industry, 2) have a very strong margin, and 3) expand its capabilities across other defense segments. The current valuation of ZEN is still cheaper than that of other comparable companies in the private defense sector and ZEN has the advantage of a faster CAGR, stronger margins and reasonable NWC. Maintain BUY.

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