Maintaining a consistent upward trajectory over an extended period, especially in the face of market uncertainty, is a challenging feat for most stocks, and in this context, Zen Technologies stood as a true outlier.
Starting the year 2023 with a trading price of ₹189, the stock has surged by an impressive 318% to reach its current price of ₹790, closing 7 out of the last eight months in gains. The stock picked up steam at the start of August after investors cheered on the company's Q1 FY24 performance. Also, the strong order wins supported the stock to trade at higher levels.
The company's unexecuted order book stood at ₹1,275 crore as of September 05, 2023, translating into 4.1x of TTM sales, which provides adequate revenue visibility over the medium term. On September 22, 2023, it received another order from the Ministry of Defence worth ₹227 crore.
Brokerage firm HDFC Securities expects order inflows of ₹200–300 crore for the balance of FY24E as per the current order pipeline, and it said the company has a success rate of around 80% in winning orders.
The company's robust outlook depends on the potential opportunities owing to the government's thrust on indigenisation, and the company expects to be a prime beneficiary of the same given its level of expertise, technical abilities, and successful track record of execution, it stated.
Strong position in the anti-drone systems market
The brokerage emphasises the company's robust position in the anti-drone systems market. Unlike many competitors who depend on imported products, Zen Technologies effectively utilises its manufacturing capacity for anti-drone systems and has a network of vendors for manufacturing, it underscored.
The company expects to win a majority of the orders in the anti-drone systems market due to its ability to make software and hardware changes to tackle evolving threats. Besides, the Agnipath Pravesh Yojana initiative by the Indian government has accelerated the procurement of simulators for the armed forces.
The market size for military training simulators is estimated to be around ₹15,000 crore. However, in the simulator market, ZTL is facing competition, especially in specialised products like tank simulators and air defence simulators, the brokerage noted.
Expectation of huge growth opportunity in the AMC business
Zen Technologies is one of the largest players in training and ground simulators in India. ZTL’s supply of simulators carry a warranty period of 36 months. The company receives 10% of the order value as AMC (Annual Maintenance Contracts) after the expiry of the warranty period of 36 months. The AMC business not only offers a high margin but also removes the lumpiness of new equipment orders, as highlighted by the brokerage.
The company generated 22% of overall revenue from the AMC business in FY23. The lifecycle of a simulator is 15 years, and it provides a lifetime revenue potential of 120% of product sale. ZTL’s AMC revenue stood at ₹40 crore as of now, and brokerage expects it to increase to ₹70 crore as per current order execution by 2025 and ₹150 crore by 2027–28.
Outlook and Valuation
Given the healthy growth outlook and strong deal intake in Q2 FY24, the brokerage revised its earnings estimates and increased the target price for the stock.
The brokerage recommends investors to buy the stock within the range of ₹721-730, with the option to accumulate more if it dips to the ₹639-653 range. This is based on a target price of ₹795 per share, which corresponds to a valuation of 40 times the FY25E earnings per share (EPS). Under the bull case scenario, the brokerage sets a higher target price of ₹845 apiece (43x FY25E EPS) to be achieved over the next two to three quarters.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.