Zen Technologies – Huge potential, but are margins sustainable?

Disclaimer:  This is not a recommendation to Buy/Sell/Hold.

Zen technologies is a micro-cap company and is engaged in manufacturing weapon and non-weapon simulators, primarily for use by armed forces, para military, police forces etc. You can read the inspiring 20 year journey of company’s managing director Ashok Atluri here.

What attracted me towards Zen Technologies is that it’s trying to solve a genuine problem of Indian Army. There is severe shortage of shooting ranges and ammunition for training for Indian Army. Even if there is no shortage, it’s not practical or advisable to use live weapon during regular training for cost reasons.

Western world is advanced in its adoption of simulators. This is what US Navy has to say “We intend to take the numbers dramatically higher in the simulator, not because it’s cheaper, but because the training is that much better”

In my review of last 10 years annual report, I have not come across any instances of misallocation of capital or any act which is against minority interest. Ofcourse there are a couple of failures like its venture into gaming industry, civil simulation market for CV/Cars etc. Management had been quite over optimist in its projections. For instance in 2005 management guided for 40% CAGR for next three years but absolute increase was less than 30% during 2005-08.

During 2001-2010 company posted average EBITA margin of more than 45% even after spending substantial amount on research & development. On average company had spent more than 15% on R&D during last ten years.  It’s a working capital heavy business, but due to outsourcing model investment in fixed asset is quite less.

Company claims to have more than 30 products, but according to my reading of annual report company could commercialized only 5-6 products till date. Other products are developed in anticipation of requirements. The total value of orders pending as on 31 March 2015 is around Rs 118.94 Cr including AMCs worth Rs 79.04 Cr. AMC’s will be executed over 5 yrs staring FY18

You can read this latest presentation to get more info

I like the business and management but unable to determine whether margins will be sustainable over next 5 years. There are lots of international and local players in the market like Alpha Design, Saab, Thales, Cubic Defence, Megitt, CAE. Even if due to Make in India policy Zen gets preference, it might be asked to match the prices quoted by international players.

You can download the compilation of annual report and peer comparison from here

Disclaimer:  This is not a recommendation to Buy/Sell/Hold.

Registration Status with SEBI:

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Details of Financial Interest in the Subject Company:

Myself/ my close relatives  do not have any holding in the company. Please consult your financial advisors before taking any buy/sell/hold decision. I may change my opinion post publication of this note and may not be able to update because of time constraints.

This entry was posted in Investing, Stock Ideas and tagged . Bookmark the permalink.

One Response to Zen Technologies – Huge potential, but are margins sustainable?

  1. sarvdeep123 says:


    Thanks for the post. I am a very new follower of your blog and want to mention that your blog has tonns of material a new learner. I am a intermediate begineer in investing who has read a couple of books but still unable to get a even 3 bagger. Could you guide me on how to pick a multibagger from small cap stocks. Any book recommendation or other suitable resource.


    Sarvdeep Malhan
    E-mail : sarvdeepmalhan123@gmail.com


Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s