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Inflows remain weak in 1HFY26

Zen Technologies (ZEN) posted weak numbersin 2QFY26, with a miss on revenue but a beat on PAT due to higher-than-expected other income. Inflows in 1HFY26 remained weak; however, management expects inflows to revive in 2H due to the finalization of the pending simulator order and improved tendering activity for anti-drone systems under the emergency procurement programs. In addition to its core business, the order book has been strong for ZEN’s subsidiaries, and a combined revenue contribution of ~INR2.5b is expected for FY26 with a fairly strong profit profile. ZEN is already building up capabilities to expand into marine simulators and eventually into air simulation, too. To bake in its 1HFY26 performance, we cut our estimates for ZEN by 25%/11%/ 12% for FY26/FY27/FY28. We also trim our TP to INR1,400 (from INR1,550), based on 30x Sep’27E EPS. The stock is currently trading at a P/E of 62.1x/33.1x/25.1x on FY26/ FY27/ FY28E EPS. Our estimates bake in a revenue/PAT CAGR of 18%/22% over FY25-28 with a strong EBITDA margin of 37% by FY28. We reiterate our Neutral rating on the stock. We would look for order inflow announcements for further sustainability of revenue going forward.

Beat on PAT due to higher other income and lower tax rate

ZEN’s revenue decreased 48% YoY to INR1.2b, missing our estimate by 10%. Gross margin was 140bp below our expectation at 55.1% vs. our estimate of 57.5%. Absolute EBITDA declined 47% YoY to INR418m, indicating a miss on our estimates by 13%. EBITDA margin at 33.5% expanded 60bp YoY, though it was below our estimates. However, the company’s PAT dipped 29% YoY, beating our estimates by 16%. PAT stood at INR462m vs. our estimate of INR398m, fueled by higher-thanexpected other income and a lower tax rate. ZEN’s PAT margin expanded 1,000bp YoY to 37.0% vs. our estimate of 28.9%. For 1HFY26, its revenue/EBITDA/PAT declined 52%/56%/40% YoY, while EBITDA margin contracted 290bp YoY to 33.9%. As of 1HFY26, ZEN’s OCF/FCF turned positive to INR1.3b/1.2b, compared to net cash outflows in the previous year. The company is now debt-free.

Recovery in inflows expected in 2HFY26

The company exited 1HFY26 with a consolidated order book of ~INR6.8b, comprising INR3.8b of equipment orders and the balance from AMC. Of this, standalone accounts for INR4.8b, while subsidiaries UTS/ARI/Vector contribute INR980m/INR920m/INR10m. Order inflows remained muted due to delays in simulator tenders and a shift in focus on emergency procurements. However, orders are expected to pick up in 2HFY26 as the pending simulator orders worth INR6.5b and anti-drone tenders move forward. The company maintains its cumulative revenue guidance of INR60b for FY26-FY28, though achieving this will require a sharp pick-up in inflows through FY27-28. ZEN’s robust net cash position, operational preparedness, and alignment with the government’s IDDM framework position it well to capitalize on emerging opportunities over the medium to long term. However, the current softness in ordering momentum suggests a slower pace of execution in the near term. We thus expect a moderate standalone revenue CAGR of 18% to factor in ZEN’s 1H performance.

Export opportunities to offer diversification

Export engagement continues to strengthen, supported by increasing inquiries from Africa, the Middle East, CIS, and Southeast Asia. ARI’s Singapore base is helping open new channels, particularly for simulation and anti-drone solutions. While exports could become a meaningful contributor over the medium term, conversion timelines in defense exports are typically long, and competition from established global OEMs remains a factor. ZEN’s focus on developing end-to-end solutions with full IP ownership aligns well with the government’s broader push to promote defense exports. We believe export traction could help diversify the order book and reduce dependence on domestic procurement cycles, though meaningful revenue contribution is likely to be gradual.

Building a connected portfolio through its subsidiaries

Subsidiaries now form a meaningful part of ZEN’s ecosystem, contributing about INR1.9b to the consolidated order book. UTS and ARI enhance simulation and export capabilities, while Vector, AI Turing, and Bhairav Robotics add depth in remote weapon and autonomous systems. These acquisitions complement ZEN’s integrated defense systems strategy and help the company offer complete, end-to-end solutions under one umbrella. Management highlighted that subsidiaries such as AI Turing and Vector have already participated in recent trials, demonstrating integrated hard-kill capabilities. While most subsidiaries are still scaling up and their revenue contribution remains modest, their technological complementarity enhances ZEN’s qualification strength for larger, more complex tenders. Management expects ~INR2.5b of combined revenue contribution from its subsidiaries in FY26, with strong prospects for the following years.

Financial outlook

We trim our estimates by 25%/11%/12% for FY26/27/28 to factor in the slowdown in execution due to delayed ordering activity. We expect a CAGR of 18%/22%/22% in revenue/EBITDA/PAT during FY25-28. This will be supported by 1) finalization of orders across simulators and anti-drones; 2) EBITDA margin of 35%-37% for FY26-28; and 3) control over working capital due to improved collections.

Valuation and view

The stock currently trades at 62.1x/33.1x/25.1x P/E on FY26/27/28E earnings. While we remain positive about the company and its ability to capitalize on the upcoming demand for simulators and anti-drones, we cut our estimates to factor in a slowdown in inflows during 1H. We thus reduce our TP to INR1,400 (from INR1,550 earlier), based on 30x Sep’27E earnings. Reiterate Neutral.

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.

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