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Decent results; Downgrade to Neutral on expensive valuations

Zen Tech posted a strong set of numbers with a beat on revenue and PAT in 4QFY25. The company received order inflows of INR1.5b during the quarter, and the current order book stands at INR6.9b. We expect Zen to benefit from the fast-tracking of defense orders in light of current geopolitical concerns. With acquisitions done during FY25, Zen was able to expand its portfolio of offerings. We upgrade our estimates by 4%/7% for FY26/27 and revise the TP to INR1,750 based on 30x Mar’27E earnings (from INR1,600). The stock is currently trading at 49.7x/33.0x P/E on FY26/27E earnings. Our estimates bake in a CAGR of 34%/40% in revenue/PAT over FY25-27 with strong EBITDA margin of 37%. While we remain positive on the company and its ability to capitalize on upcoming demand for simulators and anti-drones, our estimates and current valuations capture the positives related to upcoming orders and correspondingly a 40% PAT CAGR over FY25-27. The stock has moved up by 74% since our last update in Feb’25. We thus downgrade the stock to Neutral from BUY and would look for better price points to enter the stock

Beat on revenue and PAT

Zen posted a decent set of numbers with a beat on revenue and PAT. Revenue jumped 116% YoY to INR2.9b, beating our est. by 11%. Absolute EBITDA was largely in line with our estimate, increasing 109% YoY to INR944m. EBITDA margin contracted 100bp YoY to 32.2% vs. our estimate of 36.4% primarily due to a lower-than-expected gross margin of 59% (vs. our est. of 67%). PAT surged 177% YoY to INR849m, beating our estimate by 15% (est. of INR737m) due to a lower-than-expected tax rate and higher other income. PAT margin expanded 630bp YoY to 28.9% vs. our estimate of 27.9%. The company received orders worth INR1.5b in the quarter, leading to an order book of INR6.9b. For FY25, revenue/EBITDA/PAT were in line with our estimates at INR9.3b/INR3.1b/ INR2.6b.

Prospect pipeline strong but prolonged

The company’s standalone order book stands at INR6.9b as of Mar’25, with additional INR1b from subsidiaries. Within this, the product order book stands at INR4.2b, which we believe will be executed during 1HFY26. The company has maintained order inflow guidance of ~INR8b in 1HFY26, primarily from simulators. In 4QFY25, Zen was awarded an order from MoD worth INR1.5b for Integrated Air Defense-Combat Simulators (IADCS) for the L70 gun. The order pipeline has grown significantly due to increased government urgency following recent border incidents and geopolitical tensions. However, the finalization of these tenders may happen after 1HFY26. These orders are expected to be related to both anti-drone and simulators. Exports are also a key pipeline focus, especially for simulators and anti-drone solutions, and Zen expects inflows to materialize from the US by FY27.

Update on acquisitions

During the quarter, Zen acquired a 76% stake in ARIPL in Feb’25, with the remaining 24% expected to be acquired in FY26. ARIPL has expertise in marine and naval simulations, and the company sees a strong potential for synergies with this acquisition. With the strategic acquisition of a 51% stake in Vector Technics - one of the few indigenous manufacturers of critical drone components – the company has entered the core of the drone ecosystem. Further, the company has acquired 45.33% in Bhairav Robotics, a company focused on robotics and autonomous weapons systems. These acquisitions mark a significant step forward in the direction of next generation defense technologies and future-ready national security solutions. The company has also invested USD10m (INR868.6m) in its wholly owned subsidiary Zen Technologies USA, Inc. to expand its footprint in North America and leverage new growth opportunities in the region.

Guidance

While FY26 is expected to be a muted year due to order delays and execution timelines, Zen maintains a medium-term guidance of 50% CAGR in revenue. The revised target over FY26-FY28 stands at a cumulative INR60b+ in revenue (from a base of INR9b in FY25) --- INR10b in FY26, INR20b in FY27, and INR30 in FY28. Margin guidance remains strong at 35% on EBITDA level and 25% on PAT level, which the company has reaffirmed for the coming years. Management emphasized that while order inflows may accelerate in 1HFY26, actual revenue recognition may shift to FY27, hence the softer near-term outlook.

Financial outlook

We upgrade our estimates by 4%/7% for FY26/27. We expect a revenue/EBITDA/ PAT CAGR of 34%/40%/40% during FY25-27. This will be led by: 1) revival in order inflows across simulators and anti-drones, 2) EBITDA margin of 37% for FY26 and FY27, and 3) control over working capital due to improved collections

Valuation and view

The stock currently trades at 49.7x/33.0x P/E on FY26/27E earnings. We raise our estimates to factor in a pickup in order inflows and prospect pipelines across simulators and anti-drones. We revise TP to INR1,750 based on 30x Mar’27E earnings (from INR1,600 earlier). While we remain positive about the company and its ability to capitalize on upcoming demand for simulators and anti-drones, our estimates and current valuations capture the positives related to upcoming orders and correspondingly 40% PAT CAGR over FY25-27. The stock has moved up by 74% since our last update in Feb’25. We thus downgrade the stock to Neutral and would look for better price points to enter the stock.

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 historically, its working capital has remained high 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 management. However, any delays in the same can affect cash flows for FY26/27

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