Zen Technologies Limited (533339) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and a warm welcome to Zen Technologies Limited Q2 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. Abhishek Mehra, TIL Advisor Private Limited. Thank you. Over to you, sir.

Thank you, Adnan. Welcome everyone and thank you for joining this Q2 and H1 FY '25 Earnings Conference Call of Zen Technologies Limited. The results and investor updates have been e-mailed to you and are also available on the stock exchanges. In case anyone does not have a copy of the same, please do write to us, and we'll be happy to send it over to you. Today, we'll start the call with a brief overview of the performance, which would then be followed by the Q&A session. As a disclaimer, I would like to remind you all that everything said in this call, reflecting any outlook for the future, which can be construed as a forward-looking statement, must be viewed in conjunction with the risks and uncertainties that the company faces. These risks and uncertainties are included, but not limited to what we have mentioned in our annual reports. With that said, I'll now hand over the call to Teena Virmani from Motilal Oswal. Over to you, Teena.

Thanks, Abhishek. We welcome the management team of Zen Technologies for Q2 results -- Q2 FY '25 results con call. We have with us Mr. Ashok Atluri, Chairman and Managing Director; Mr. Afzal Malkani, CFO; and Ms. Shilpa. So over to you, sir, for your opening remarks. And after that, we will open the floor for questions and as answer.

Good afternoon, everybody, fellow shareholders, great to connect with you on this earnings call. I will not talk much about the earnings. I have tried to describe because all the presentation is shared with you. And any Q&A with regard to that, any questions you have, please ask me and we will try to answer them to your satisfaction. Beside the earnings, we continue to -- our efforts to maintain our leadership position in training and simulation, and we continue to invest to develop more products and improve existing products. The demand for these products continues to grow, and there's a very large market for this segment and especially as we have told that because of the Ukraine-Russia war, which hopefully will end now. People have discovered that it is training, which is more important. It's the man not the machine that matters in a war. So we are trying to protect that leadership position. As Peter Lynch famously said, "don't pull the flowers and water the weeds. " So we are trying to preserve what we have and continue to maintain that leadership and ensure that this leadership continues. As we look into the future, we are also looking these capabilities to get into navy and airports. And in these 2 segments, we want to get in both organically and through acquisitions. And so this is the 2 areas that we are looking to expand in terms of market. Now, again, we have seen some gross margin drop, and this is -- we feel that's mainly due to the evolving nature of the new products that are coming, I know there's a lot of -- as we speak, the threats are evolving, so we're requiring -- the customer is asking changes, and we are accommodating those changes and very, very important for us to do and take the short-term hit because we need to ensure that the product is absolutely world class at this point in time, and we cannot have any compromise in this. We see that -- and even if you look -- and we've been spending a lot of money on the R&D for the customer deliveries. And we see that the product that we first gave in 2021 -- exhibited in 2021 versus the product now with actually 2 generations ahead and we -- recent market survey tells that we are absolutely one of the top anti-drone systems currently. And again, both these margins are impacted both by the geography and the product mix and both have contributed to that. But again, because of the operating leverage, what our earlier promise has been that we will have 35% of EBITDA and 25% of PAT, we strive to maintain those margins. Again, when we look at the anti-drone systems, our acquisition with AiTuring is playing out very well. And AiTuring, the remote control weapon station is really becoming very sought-after equipment in various armies and they have -- what we have estimated is both the AiTuring remote control weapon station and surveillance systems have a market of about $1 billion in India. And outside India its much, much larger market. And so we are very, very extremely excited about the products in the coming future. Pertaining to -- again, well, I want to go to export very quickly. And what we see is that the current focus markets have been basically Middle East, Africa and CIS countries. We have had a presence in U.S., but not very active presence, in the sense that we have not really done any sales from there, even though we were very hopeful of the sales. But now we see that the dramatic changes happening there, and we are planning to double down on our U.S. investment and especially for the North American and South American markets. And we think these new countries like Argentina -- your large countries like Argentina, even smaller countries like El Salvador are very, very actively looking at solutions which are very, very modern, and we are looking to penetrate into those markets. And as you know, the Trump win -- Mr. Donald Trump's win is a good news for Zen because now we think that the Make in America will become a big thing there. And we -- and as usual, Mr. Trump actually push us for sales of his own country's products. So again, coming back to the fact that we have raised -- we raised through a QIP INR 1,000 crores. It was subscribed by more than 5x. Part of the proceeds we intend to deploy for acquisitions and we have in view both Indian and overseas targets. A typical size, we are looking at is between INR 100 crores to INR 300 crores. Again, typical size will not restrict us going after larger acquisition if they make strategic sense for us. And if they make strategic sense, we'll go after the larger acquisitions also. By the way, we are very conscious about the failure rate of such acquisitions. They are, as you know, HBR pointed out, Harvard Business Review pointed out as high as 90%. So -- and every acquirer thinks that they are an exception and their acquisition will go. But in my defense, I can say only one thing that I'm not an MBA, and I'm not an MBA from Harvard, so that should derisk us to a large extent. So I'll not be -- I'll be unfettered by any case studies we are looking at. So we'll be looking at actual value of the -- these businesses for Zen. And we will Always keep in mind that the hard earned money for the shareholder is what we are betting. And we should always remember -- always keep in mind that if I do a bad decision, if we do a bad decision, it is the promoters who suffer the most because we have very, very -- almost all of our net worth is in these shares. And if we make a bad decision, we are the biggest sufferers in this, and so that should kind of assure you that we'll not do any misadventure with the money that we have. Again, coming to the order book position, our order book position -- the orders stand executed, but the order inflow has been slow. But I have been telling from the beginning of the year that the order inflow will start towards the third end quarter and end of third quarter, and the major orders will come in the fourth quarter. Even though the order pipeline is almost INR 3,500 crores we expect about INR 1,200 crores to come in by the end of this financial year, which we'll be able to execute in the next year. So with this brief introduction, I'll open the field for question-and-answer sessions, and I look forward to answering them to your satisfaction.

[Operator Instructions] Now we will take our first question from Mr. Akshay, CD Integrated Services Limited.

Am I audible, sir?

Yes, you are audible.

So congratulations on a very good set of numbers, sir. Sir, I mainly have 2 questions. The first question is, we have been guiding for INR 900 crores revenue in FY '25. And we have already done around INR 500 crores in the first half. So even if you do the same amount of revenue in half two, then we will cross easily to INR 1,000 crores. So any change in the FY '25 revenue guidance? And the follow-up question on that would be, what is our FY '26? Can you give some color on how our performance will be in FY '26 over FY '25? That is my first question, sir.

Yes. So the first question was then we have already done INR 500 crores. Shouldn't we do at least as much in the second half and cross INR 1,000 crores. Again, last year, when we projected INR 450 crores, we fell short by INR 20 crores, and we achieved only INR 430 crores. This time, we have been cautious and we have set a target of INR 900 crores. And we hope to cross INR 900 crores, but by how much, let us wait and see. But again, it is not that the execution -- more execution will happen in the second half. It's not like that. These are all orders that we have. And typically, what we do is in Zen we try to execute orders as fast as possible. We don't try to smoothen the curve or anything like that because money today is much more worth than money tomorrow. So the execution will happen as soon as we can. And with respect to the FY '26 projection, we have said that we'll have an average CAGR of 50% over the next 3 years. And we are confident given the huge order pipeline that we have that we'll be able to achieve the 50% average CAGR over the next 3 years based on the '25 figure.

Okay, sir. And sir, my second question is about the order book. We didn't get any order in Q2. And so how should we look our order book in the second half of FY '25 and than in FY '26? And can you give split between our expected anti-drone system and our simulation system order book split in future? And also, can you please give some color on the EBITDA margin front as to a split between anti-drone system and simulation system?

Yes. So as I indicated just now that we are expecting the order towards the end of the third quarter and in the fourth quarter the orders will start coming in. And we are expecting about INR 1,200 crores worth of orders to come in. And with the existing almost INR 300 crores of pending orders, we should be able to achieve the target that we are aiming at. And with regards to EBITDA margin, I would say that, on a consolidated basis, we have about 35%. And you have also asked for the order book split between simulators and the future order book position. So we will not be able to exactly predict that at this point in time. But again, we expect a 40-60 split to be there between, last year, it was there. I think maybe we -- probably that will continue in this year also.

Okay, sir. Okay. And last one short question is what is your long-term view, like how we should see Zen Technology in the coming 5 to 10 years? Can you give some color on the long-term views, and what type of products and solutions we are providing to the military systems?

Long-term view is, we basically want to get into various other simulation segment, training and simulation like Navy and Air Force and become a leading player as we are in the Army. And second, globally, we want to become a one-stop solution for all drone threats, all anti-drone solutions, everybody should prefer coming to Zen. So these 2 are the things -- the target that we have for the next 5 years. And I think -- and opportunistically, we will probably diversify and go into something else, but this is the main target that we have.

Our next speaker is Mr. Dipen Vakil from Philips Capital.

Congratulations on a great execution. Sir, my first question is, in your opening remarks, you mentioned that right now, we are not -- you're present in the U.S. market, but not very active, and you're looking for growth coming in or rather you are planning on expanding in that geography. So can you expand a little bit more as to what areas you are seeing opportunities in America? And are you planning to set up a manufacturing facility over there or just a plain exports from here to U.S.?

No. Yes. So I think the U.S. market now, what we think is that there's going to be a lot of changes in the U.S. market. There's a lot of bureaucracy will be removed as they say, as Elon Musk invented new word called, whenever there's a huge layoff, we call it Twittered. So Elon Musk is expected to Twitter the bureaucracy in U.S. And this we think that will help not only the established players, the big brands, but also new companies to make a big entry into the thing. So we -- and with this, of course, the manufacturing for the product that we are supplying to U.S. has to be in the U.S. So this will involve setting up of manufacturing facility also at least therefore to qualify as a Make in America, it has to be 51% and we want to be true to the spirit and do the 51% manufacturing there. And we think that the products that we have are absolutely world-class. They are the best in the world. We believe in that as training simulators and anti-drone systems. So this is a great opportunity to go and offer our solutions to America and through America to the other rest of the countries in North and South America.

Got it, sir. Sir, and another question, sir, you mentioned that your order pipeline right now is INR 3,500 crores, and of which you expect INR 1,200 crores of orders in this year. Is it possible to give some more details as to which areas are these orders expected from? And what kind of long-term orders are there in the pipeline also?

So I really don't want to because there are certain orders which are single vendors, there are certain orders which are we are competing in. And I really don't want to disclose it because it will not be in the interest of the company to do that. But yes, the order size, we expect the order pipeline to explode as we speak from INR 3,500 crores to multiple times of that. And we think that -- again, this is a combination of simulators and anti-drone systems, but it will be heavily biased towards simulators at this point in time. But yes, but this is the overall picture. But I really don't want to give the finer split between the -- in terms of products, where which products we are going to get.

Got it sir. So sir, right now, we are just catering to largely to the requirements of Army, and now we are planning to expand towards Navy and Air Force. So is that the right understanding?

Yes, absolutely. So in terms of training and simulators, yes, we would want to do that, yes.

Got it. And any major R&D which has happened in this quarter apart from what you mentioned in last quarter?

So we keep doing the R&D. And what we typically do is only when the product is realized and the customer kind of sees and says, listen, this has a lot of market we want to buy it. Do we tell us? We are -- in fact, if you look at our track record, we have lot of failed products that we have done R&D, but then we have not taken it to the market. So it's premature to talk about R&D products as such. But one thing I can tell you is, these are all asymmetric bets, in the sense that we invest very little money. If it fails, we don't feel the pain, but if it succeeds, it gives you enormous revenues. So yes, we are doing a lot of -- basically, we are an IP company, R&D-based company, so we are doing lot of products at this point in time, and we think some of them are really, really path-breaking. But again, til we actually develop it fully and unveil it to the customers confidentially and then they say, yes, this is the product, we will not be able to share the detail with you.

Got it, sir. So just last small question, sir. So which is the area where you're seeing the growth potential exploding between, say, training simulation, ADS and some of your new AI-enabled products that you are catering to or right now you're developing? So which is the area where you think there is the most growth potential right now?

So in terms of short-term pain, everybody is feeling the pain of the drones attacks, the drones are becoming a very, very severe problem. And drones with the AI-enabled remote control weapon stations and surveillance system is the complete solution that they are looking forward. I think these are going to have a very, very big market in the immediate term. I think those will be the larger orders. But again, people who are really long-term oriented building capabilities so that they can sustain any war over a long period of time would require training and simulation as the go-to solution. So I think there will be -- both the things are required for right thinking armed forces. And depending on what is the urgency -- they think there is a war coming, I think they would probably invest in anti-drone systems. Otherwise, training and simulation is very, very large -- again, it's a very, very large market.

Our next speaker is Mr. Raja Mohan.

Congratulations, sir, on another great quarter. On the U.S. front, you have been indicating in this call, in the course of this call, that maintaining the principle of this 51% manufacturing is something you're going to be very particular about in respect to their rules. You also indicated previously, our products are cutting-edge worldwide. So does that make it easy for our manufacturing entry in a big way until the new administration of Mr. Trump?

Yes. See, what we are betting is that the new administration would be buying the best products, and they will not be worried about whether it is the way the big prime or they don't care. See if this merit-based acquisition starts happening, I think we stand a very good chance. In fact, in an exhibition last year when we were in I/ITSEC in Orlando that's world's largest...

Sir, unable to hear you.

I'm sorry. Is everybody else able to hear me?

Yes, we can hear you, sir.

Sorry, Raj Mohan, I think there's something wrong with you, then -- your connection.

Sorry, I think there's some technical issue at my guys because...

Sir, we request you to reconnect and please rejoin the queue. Till that time we'll take the next speaker. Our next speaker is Mr. Amit Dixit from ICICI Securities.

Just couple of questions. The first one is that there are 2 or other 4 very interesting products we introduced, 2 among them are Prahasta and Barbarik. And we have been hearing a lot about them. So just wanted to understand whether they are being sent for testing? And if any anything further on that front has been done to commercialize these 2 products.

So Prahasta is undergoing more R&D at this point in time to meet the requirements. And there's a lot of excitement around it. And with respect to Barbarik, the Army has seen it, they have tested it and they have found it to be very useful. And there is some -- we expect requirements to come up in the next few months, and we'll be waiting for that. And again, Barbarik requirement will be very huge. And we have estimated the complete, I mean, it is not only Barbarik, but other remote control weapon stations references all put together. And surveillance system put together almost $1 billion, more than INR 80,000 crores. So I think the exciting time for these products surveillance and remote control products weapon stations.

And what would be the time to market for Barbarik.

We expect orders to come in the next year.

Next year. Okay. The second question is around your opening remarks again on Navy and Air Force, which was but expected since you are strong in Army now. And Navy and Air force, we are seeing many new platforms coming. So is it possible to explain a bit further what kind of platforms you are looking at? Are you looking at specifically at new submarines that are coming up? Are you looking at, let us say, in case of Tejas, the new avionics system that has come? If you can explain a little bit more in detail what kind of training and simulation systems we are looking at?

So largely, it will be ship-based and aircraft based simulators that we are looking at because we are very good at weapon platforms. So -- and the ship, along with the weapon stations what will be required. Because we already have weapon station capability, just require the ship, and we have the motion platform for them for both the aircraft and the Navy. So we expect that -- so it is a generic statement I'm trying to make. I don't really want to get into which Tejas or anything like that, but it will be largely these simulators that we will be getting in.

And any market size you can give on this?

Yes. I think there would be -- these are going to be large. And again, I think we would be expecting at least a couple of billion dollars worth of business in the next 2 years in this.

And there will be export opportunities also like your...

Large export opportunities in these segments, yes. So they're going to be very big, yes.

Our next speaker is Mr. CA Amit Kumar, investor.

Congrats on a good of numbers. So INR 3,500 crores is a big pipeline we are expecting in a few months? Could you please give some bifurcation of the INR 3,500 crores?

I mean it's an order pipeline. So it includes a mix of simulators to training systems and anti-drone systems.

Sorry. Is it submitted or we are expecting to submit?

No, So out of this around -- I would say about INR 2,000 crores are submitted, another INR 15 crores have to be submitted.

Okay. Okay. And if you could provide some bifurcation how much is anti-drone, how much is for simulators?

I'll avoid that, yes, at this point of time.

Our next speaker is Mr. Ashish Soni from Family Office.

So sir, regarding U.S. manufacturing, how long it will take because you said, Make in America. So if at all, you have to set up the approval policy from Trump administration. So how long it will take for us to set up because we do assembling in India typically and we have supplier chain for 85% of our work, right? So what's the timeline, thought process at this stage?

We are identifying the supply chain there as we speak at this point in time. And we think that around -- we would take about 8 months or so to identify and set for any production or orders that we get. Again, we expect the orders to come not in the next financial year. They may start in the next financial year, but probably '27 FY is what we expect large orders to come there.

Will it cater only to U.S. market or it will be like Argentina, El Salvador also it will be catering from U.S.

We are looking for both -- the whole of Americas, the North and South America. Yes.

From Make in America theme you're saying.

Even from there, it's also easy to tackle the other NATO countries like Europe, most European countries. So it will become a hub for these NATO countries and North and South America.

Okay, sir. And regarding this Navy and Air Force order, any time line you're looking when which financial year they can start?

So we are looking at acquisitions in this regard, and we are trying -- we are looking at organic opportunities also. And we think orders may be coming in the next year. Definitely by next year, we'll start getting orders in this regard.

Next speaker is Mr. Rudresh Kalyani.

So see, in India, we are following -- we are outsourcing everything, and we do just IP. So -- and when it comes to America, we are diverting from the strategy. So what is the -- is it just a policy direction which is forcing you to divert that strategy? Or what is that?

So Rudresh, thanks for the question. What Rudresh is asking is, in India, as a scaling up strategy, what we have done is, we have outsourced almost 85% of our manufacturing to the supply chain that we have, and we do the final integration and testing and final software integration and dispatch and post services we do. Are we having -- going to have a different strategy in U.S.? No, Rudresh, we are going to have the same strategy. What we are doing is we are identifying supply chain, the same capabilities in U.S., and they are available. By the way, there are a lot of SMEs, very, very competent SMEs in U.S. too. And with the focus by the new President on complete domestic manufacturing, I think it's only going to be ramped up those capabilities. So we will do the same principle. We'll try to get it manufactured with the existing supply chain there, and then we can -- then we'll integrate. It is going to be the same. There's no difference in strategy there and here. We will not be able to set up the system and start manufacturing next year itself. So we have to identify, test them out and be ready for the orders that we get and execute them.

Okay. And when it comes to the acquisition of the startup, which you talked about, so most of the start-ups which works in this domain will be burning cash. So are you open to those kinds of start-ups and have an EPS dilutive at our consolidated balance sheet? Or how do you look at the acquisition?

So what we have seen, Rudresh, whenever we look at the company, what we look at is 2 things. One is extremely competent technical team. And the second is they already have developed some considerable IP based on their strengths. So when we acquire the company, so we already have some products in mind. These are the products that they are going to do, and this is where the market is. And what -- and what we are seeing is, typically, the startups try to do too many things. So our job as an investor is to guide them and saying, listen, you're doing these 20 projects, but the 19 of these projects don't make sense or 18 of these projects don't make sense for these, these reasons: they don't have a market, they have competition, but -- or something, some of the reasons. But this one product has a huge market, huge potential and very little competition. So why don't we focus on that? And so this is what we have done in the 2 acquisitions that we have done. And then what happens is they really put all their strength. So basically, it's the dispersed light versus the laser that you have completely focused and trying to cut into one market. So we -- and again, we put in a lot of money. There's no doubt about that. We don't hesitate to put in a lot of money, but for the specific purpose. We just don't go along and say, okay, you keep burning the cash as you're doing 20 projects. So I think what happens is invariably, there's a good product that comes out of that and we are able to go and offer it to the customer. So -- but to your question, in the long -- in a way, what you're asking is, if there is a big opportunity and there is EPS dilution in the short term, would you be willing to do that? The answer is yes. But we haven't seen anything like that. But this is what is happening in reality that they're too dispersed. We try to make them concentrate efforts and make bets on one or two things so that they can realize and become profitable very soon.

Okay. And do you foresee any headwinds?

No. I mean the -- I think -- we think that the world is going to be a little peaceful with the new change in the U.S. government. I think the wars will calm down. But that will give a very good opportunity for people to get trained because now everybody has discovered that training is the most important part. And the only way to become unbeatable is by training and becoming very strong. And second is the drone threats are becoming very, very real. They are becoming real by the day and they can do asymmetric damage. So while the threat of war will calm down, which may seem like a headwind, but we think it's a tailwind because we'll be able to sell more training equipment and anti-drone systems.

Okay. And my final question is, are we qualified for all the projects, will the qualification criteria lies on the project order, which we have executed as well?

So in the sense that whatever tenders are -- the RFPs are coming or the tenders are coming are typically they assess the capability of the Indian companies. And based on that only they issue the RFP. And based on that, we are typically -- we typically get qualified in most of the projects. And in some -- very rarely they ask for something which we don't have. In those rare cases, we may not be bidding for that. But typically in the anti-drone space and the army simulator space, we are there almost in every bid.

I asked that because in most of the EPC projects, unless you have executed INR 500 cr order, they won't allow us to bid for the INR 1,000 crore order. So I was asking that aspect.

So no. So in this case, what they typically do is they -- in Indian -- what they do is one thing is they have a requirement of 5% of the -- company should have 5% of the net worth of the project that is being executed. So that means to say today, we have INR 1,500 crores of net worth. So we can execute also INR 30,000 crores worth of tenders we can bid for. Okay. Second thing is, unlike the EPC projects, where the capability has to be demonstrated, in the army thing, what they do is they actually ask you to show the product and demonstrate the product and show it is working fully before they place the order on you. So that means to say, a company that is participating in the bid has already invested and proven the product. Once you prove the product, it is just replication after that, which is very easy. That's not very difficult. So here, it is not the 50% of the EPC, but actual product being tested in a trial. So if you have the product in the trial and you have this 5% net worth capability, then you have to go -- you can go ahead and you win the contract. I hope I've answered your question, Rudresh?

Yes. Yes. You did.

Our next speaker is Mr. Raja Mohan. Sir, can you hear us now, Mr. Raja Moha?

Yes, I am able to hear you. Am I audible?

Yes, you're audible, sir.

Yes. Mr. Atluri, the question was, I think, you answered to a different question about the U.S. front. But here, I just generally wanted to understand whether the products that we have, we have always mentioned in the past that global leaders have also looked at our products with awe. So our products in the U.S. environment under the new administration would be welcomed to set up manufacturing capacities is what you feel, right?

Yes. So our products -- again, it's a good question in the sense, Raja Mohan, what we have done till now our simulators are typically more oriented towards what the equipment that we have. Their equipment may be different, but we have the edge in the sense that the software, the underlying software that is there is the same, in the sense how the tank behave. The physical appearance may be different, but the algorithms that run the tank are the same. So we can adapt our software to their technology. And yes -- so if we are developing that -- we have such capability and we are manufacturing in the U.S., the U.S. will definitely welcome us with open arms, yes.

Fine. On product granularity, I wanted, specifically, on these 3 products. One is, you talked about the Hard Kill in anti-drone and you already supplied 1 unit to the Indian army. Have you seen more orders on that front? Or are you on the verge of making more orders there? Similarly on space anti-drone systems, I wanted to understand that you stand? And yes, these 2 products.

What was the second question? Space anti-drone systems?

On space, you said in anti-drone, you said until now, we have a large land presence, so on space, also you're looking at exploring the opportunities, if I understand correctly.

Yes. So that's what -- actually, the second was for simulators, we are focused on the Army, the land forces till now. We are also looking at Navy and Air Force to expand into those 2 segments. And with respect to the first question, the Hard Kill, we have been able to prove now based on our capability we are expecting more orders, more tender, more requirements to come up. And since we are a proven company, we expect the orders to be placed on us, yes. So no orders have been received till now, but we expect more orders to come in, in the future.

Yes, sorry, I mistook -- I wrongly phrased it as anti-drone for space. I understand now. And on the sites and surveillance as the third potential revenue stream for you, when do you see it materially happening for you?

Next financial year. There are 2 things, one is the remote control weapon station and the other is surveillance systems, both the things we expect next year to be the year for when we'll start getting orders in this.

Okay. One final question, in this whole backdrop of explosive order opportunities, would you have an internal estimate to share on the FY '26 order inflow that you see over this INR 1,200 crores for this year?

So again, Raja Mohan, what I would restrict myself to is that, we are expecting, on an average, a CAGR of about 50%. So the order book, maybe it should be upwards of INR 2,000 crores if you want to achieve that. So again, we think that the order book in -- FY '26 is going to be really big for orders that we are expecting. So it may be a little more than that. But I think FY '26 is going to be very exciting for us in terms of order inflow.

Our next speaker, Mr. Sanjaya.

We are glad to hear that you are about to kind of get a lot of new order, some INR 1,200 crore. I was just trying to understand one thing, that what really is the order cycle for you, like is it like 1 year, 6 months? Because you have been fairly confident about winning new -- all these orders for almost a year now so you must be having this pipeline by back then. So is it that it is so very, very long to convert the pipeline to order?

I mean to say that typically, it may be -- if it is not emergency procurement, it could be as much as 18 months or so.

18 month. Okay, okay. And that is the reason why you were also talking about $1 billion kind of order inflow in a year or time, right, sir?

No, I never said about $1 billion order inflow, I don't remember saying that, sorry.

No, no, You said that in a couple of years because you were getting into several new areas and several new markets. And so you -- and the opportunity size that you are now -- you were opening up for yourself, you may at some point of time start seeing $1 billion worth of order inflow?

At some point in time, we'll definitely see, but which point of time is something which we need to say. But again, we have said that we'll be growing at a CAGR of 50% over the -- on an average basis, and we think that is something -- again, Sanjay, very frankly, these kind of things may happen. I would not say that they will not happen, but it may happen then it will be all positive black swan events for all of us. So we look forward. I hope your prediction comes true.

Okay. And sir, the last thing, I'm sure you might have already explained. This quarterly volatility in margin, particularly in this quarter your revenue was so fairly high, but -- and also exports, which I thought that has better margin, but your overall EBITDA margin was lower than first quarter? Can you please repeat it for me, if you don't mind?

Yes. I'll let Afzal, our CFO, respond to that. Afzal, please go ahead.

Yes, sure, sir. So Sanjaya, we request you not to look at the gross margin on quarterly basis, but consider for the whole year. You are correct that in H1 '25, our gross margin is 50%, which is quite lower. However, it is partly offset from the benefit of scale of operations. And despite the lower margin, we were able to maintain our operational margin of 37% in H1. Though in the Q2, it is on the lower side, but in H1 this operational EBITDA is around 36.8%, which is above our guidance given for 35%. And PAT is also around 28%. Because there was a substantial reduction in labor and overhead cost in execution of these orders due to which we were able to maintain our EBITDA and profit margin. And apart from this, as mentioned by our GM, this is that evolving stage of our raw material cost is on a higher side due to higher allocation of R&D expenditure. And after that, our raw material cost will be coming down and within our expected range. And also there is a change. As mentioned by you that there is a change in the geography mix and our export in H2 will be significantly higher, and we'll get a better margin in the export business. And additionally, there was a slight change in the product mix also in the simulator itself in H1, due to which our gross margin was slightly affected in H1. I hope I answered your questions.

So you're saying that your margin profile in the second half will be better?

I'm saying export will be higher in that. We generally give guidance, whatever may be the margin, but it will be partly offset with the operating leverage. And we will be able to maintain our EBITDA and PAT. That is for sure.

Our next speaker is Ms. Smita.

Am I audible?

Yes, you are audible.

So sir, I have been following your company since a very long time, and congratulations on a great set of numbers. I just wanted to ask 2 questions. First of all, you have been talking about war for quite some time, and you feel that because of that, there can be a good opportunity for our company. However, post Trump there, and as U.S. was the onetime king in the defense equipment market, do you feel with the competition that we have from the U.S. in this segment, do you feel you have competition in your product in U.S. and you'll be able to do good with the competitor?

Sorry, sir, you are on mute.

Yes. So yes. So we will -- we expect the competition that we have from U.S., we -- again, we think we are the best in the world at this point in time. We don't think American products are better than us, and we know for sure because we have seen them in various exhibitions. And post-Trump, our thing is that we want to set up -- have a setup in U.S., a manufacturing setup. And we want to sell from America to both for America and outside to American allies and South America. So we think that, again, the competition will be there, but we think our products are the best in this category.

So sir, again, I wanted to ask one thing that how much percentage wise, if you could decipher for us that how much would U.S. be of your entire revenue going to FY '26 or '27?

Again, this is a difficult question to answer. Very frankly, America -- the figure that I have is America spends almost $4 billion every year in terms of training for the Army itself. So that's a very large market. And even if you're looking at a couple of hundred million dollars, that's going to be big for Zen. So I think that it could be as little as -- in FY '27, it could be a little less at about 10% to 15%, but it could go as high as 50%. So this -- by the way, we haven't factored this into our growth plans, and this will be a completely additional revenue that we will be getting.

Okay. Now my last question, sir. Looking at India's order book, we have seen in many areas, government has gone down with its order, whether it's related to defense or is it related to railways or anything where government infrastructure is required. So do you also see that same slowdown in government order book in India?

No, no. We don't see. We don't see any slowdown in the defense orders. We expect the orders to come through. But definitely, there may be some delay in action, but there is definitely not any complete elimination of the orders or anything like that. But with the things how they are -- the government is moving and they're very, very conscious about making India very, very strong and unbeatable in case of a war. So we think there is no slowdown in that path and that the order procurement will be lesser than what is projected.

Okay. On a lighter note, sir, just one simple question as a citizen of India. Do you see actually third world war taking place as you were talking about war for so many years, for so many quarters?

So actually, had Trump not come, I would have probably worried that there was a third world war might happen. But with Trump coming, he's -- I mean, he's a very strong guy and he'll really push everybody to shut up. And then as a [Foreign Language] he may ask them to buy something from him. Which is good news for us because they are having American setup. I think it's a very, very good news in the sense that wars will come to an end and because -- he's a very smart guy. He looks a little commercial oriented, but he is a very, very smart guy. And the team that he has the Dream Team, whether Vivek Ramaswamy, Elon Musk, or my God, such a powerful brain to have with him. And J.D. Vance is Vice President. I wouldn't have said much about JD Vance, but he's married to a Telugu girl, so that actually puts him on the top. And then you have Tulsi Gabbard. So I think it's a fantastic team and a great president. And I think it's good news all over for all of us. I look forward to -- and this is going to be no third world war. I hope I am not wrong, and I feel very confident that world will be a much peaceful place now onwards. But again, the people will prepare for war. I'm very sure after this lull, the sudden wars that erupted have actually kind of shaken people's confidence that wars have ended all together. So they will prepare for -- because Trump is not going to last forever. What happens after Trump goes, will be something that will be bothering everybody. And so the preparation for war and for new threats will continue.

Do we see any competition from Israel, sir?

So no, no, Israel has never competed with us in any of the segments that we are there in India. And very frankly, we are not collaborated with Israel also much. They have been -- so -- but anti-drone system, they are active, but they are -- because of the India's extreme policy of Make in India IPO, Indian own thing, they have not been able to compete with us. But again, we are going abroad and we are trying to supply -- we think we -- even in anti-drone space, we're absolutely now reaching the top of the table.

And about your new products that you are launching, sir, for that also?

Yes. So again, we will -- we feel very confident because the ultralight remote control weapon station that we have launched, we are claiming it to be the world's lightest at this point in time. And that means a person can carry it. Typically, a crane would be required to lift it. Now it's a man portable kind of thing. So those kind of things, we haven't seen anywhere. But again, the world is full of surprises. So we are just looking forward if anybody will come up with anything. But again, we are -- we think that we are absolutely -- those products also will be the best in the world.

So then do we expect our cash conversion cycle to go down?

Sorry, I didn't understand the question now. What was that?

Cash conversion cycle. Can we expect it to go down further?

So realize the payments earlier is what you're asking?

Yes, yes.

Yes. So I think that may not happen because either for exports or for domestic market, typically, it's been 4 months or so, I think that will continue. But Afzal, would you like to add something there?

Yes. So it may -- yes. So if you see in the current -- it may again go back to the last financial year, 31st March 2024, in which our working capital cycle was around 148 days. Currently, it is about 200 days in H1. This is due to this increase in receivable is in H1 '25, it was on a higher side because the higher sales in H1 '25. And actually, in absolute terms, also receivables are INR 411 crores, and our turnover for H1 '25 was around INR 496 crores. But however, just we would like to inform you that out of the total debtors of INR 411 crores, INR 350 crores is for the below 6 month, below 180 days. So going forward, we can say that by end of this financial year, it will be again down to 160 to 170 days. This significant realization will happen in the current quarter.

Next question is from Anurag Aggarwal.

Sir, I had 3 questions. So you mentioned you were very positive about AiTuring, our subsidiary. Could you highlight a bit more about the capabilities of that company?

So primarily, they're doing 2 product ranges. One is remote control weapon station. The second is surveillance systems. So they are -- these are their capabilities, and these are the products that they have launched. So I think, yes, we will be doing a range of -- for other weapon systems also, we will be doing -- for remote control weapon station. And we want to really establish as -- again, the whole point is, while we started it as adjunct to anti-drone systems, we see these remote control weapon stations and surveillance system as independent products by themselves. So I think it's going to be interesting.

Got it. Another question is, sir, you mentioned that out of the INR 3,500 crore order pipeline, we are expecting about INR 1,200 crores to come into our company. Considering that we are one of the best producers of anti-drone systems and simulators in India or maybe in the world, don't you think the conversion ratio is very less, like out of INR 3,500 crores only INR 1,200 crores?

No. So what I'm saying is that, that's the order book -- it's not the conversion. What we are saying is, out of that INR 1,200 crores, we would have actually been decided. So remaining INR 2,000 plus crores would not have been decided. So we -- again, we think our conversion ratio will be much, much higher than -- it will be much higher, almost like 80% plus kind of thing.

Okay. That's good to hear. Thirdly, sir, when we say 50% CAGR, do we include the acquisitions that we are planning to do? Or do we include these new products that we are planning to launch or are in the midst of launching?

So a bit of that is factored in, a bit of -- especially anti-drone system when we integrate the remote control weapon station or a thing that is factored in, but not the independent sales that may come through that and the acquisition. That's not factored.

Acquisition is not factored in?

Acquisition income is not factored in.

So acquisitions involving Navy or air defense -- air simulators, aviation simulators will -- are not factored in?

They are not factored in.

Our next question is from Mr. Sanjay Kai.

Am I audible?

Yes, sir, you're audible.

Sir, congratulations on a good set of numbers. My question is about, you mentioned that most of the orders will start flowing in, in Q3, end of Q3 and Q4. So those orders are mainly from India domestic orders or even you are talking about export orders?

A combination of both.

Okay. So right now, this export orders, which are like to be executed to be paid, executed about INR 400 crores, right -- pending for almost now we got order maybe before start of the year, financial year and it is still pending. So is it -- they are scheduled to execute by Q3 or Q4?

Afzal, you may take over this question. I think last quarter also we did...

Yes, last quarter also, we executed around INR 64 crores. And remaining export order will be -- out of the remaining order, 80% of the export order will be executed within this financial years only.

Okay, okay. And my last question is about, sir, like you mentioned the target for this financial year is about INR 900 crores. And considering INR 500 crores is already done by H1, so are you saying that we will be -- I mean, the remaining quarters, are we seeing that will be -- the revenue will be lesser than H1? Or will -- there is a possibility that we will hit INR 1,000 crore?

We will definitely exceed INR 900 crores. I mean I'll not say that whether it will be -- it will hit INR 1,000 crores or not. But to your question, again, we are projecting not -- again, if you go quarter-on-quarter, that is actually dangerous. Defense companies are very dangerous. So go on a yearly basis and try to say year-on-year growth will be the best kind of test. So don't go on quarter-on-quarter because quarters can be very uneven in defense business.

Ladies and gentlemen, we will take last few questions. And we will end the call in next 5 minutes. Our next speaker is Mr. Kush Nahar.

My question was, after we have established a U.S. facility, do you think a cost structure will change significantly in terms of our employee cost affecting the EBITDA margins going ahead?

So again, what we try to do is the model that we have had in India for the past 30 years, keep your fixed cost to the minimum. So that even in the worst cases where there are no even dry period, you are able to sustain. And that is the reason we never invested in huge manufacturing setups and huge plant and machinery -- plant and machinery or even employees required for that. And I think that is the same model that we'll continue there where we will have a supply chain that is built and that's ready to execute the orders rather than taking on the complete setting up the plant and machinery and having a number of workers to do that, man that thing. So yes, I think we'll keep the -- we are very conscious about that because otherwise, as we wouldn't have survived in the Indian environment 10 years prior to that -- for last 20 years, 20 years before that, it was a very, very hostile environment. So yes, I think the cost will not go up dramatically and will not impact us significantly.

Our next speaker is Mr. Vansh Singh.

Thanks a lot for the numbers. I just had a question on Hard Kill thing that we had deployed already to the Army. How many more of those are they required, and do we have any export potential for that as well?

Okay. So very quickly, basically, when we look at Soft Kill and Hard Kill, Soft Kill basically means that you use signals to bring down the drone. And you don't try to kill -- shoot at it and kill it. But in the case of Hard Kill, you actually shoot at it. Call it kinetic energy and use the kinetic energy and destroy it and -- but the danger is that if there is exposure in that, it may explode and it may put collateral damage. So a lot of people in the border areas or areas where they don't care -- where they feel there will be no collateral damage, they typically shoot it down. So this Hard Kill demand is really dramatically increasing as we speak. And we expect that there will be a lot of orders, not only in India, but also overseas for this Hard Kill. And again, when we talk about Hard Kill, so there is the anti-drone system, and there is a Hard Kill, which is interface to the anti-drone system. We'll -- so a lot of people are saying, listen, we you're hard integrating the Hard Kill system, the Hard Kill weapons will be given by us, which is a perfect problem because we don't do deal any lethal system. We are completely non-lethal company. So what -- so we are the company that is saying, give us your weapons, and we will integrate it with our anti-drone systems, and we will give the platform on which you can keep your weapon system. So this is the dream solution for most of the armies where they don't want to invest again in the weapon system, maybe laser or anything like that, they want to use the existing system. So here, we have an adapter for the weapon system, a remote control weapon station. We have a camera that is on -- hooked on to that, and we have a anti-drone system. So their costs come down dramatically, and I think there's a huge, huge demand for these kind of Hard Kill system, where we are not pushing the weapon system, and we are saying, give me your weapon system, and we will integrate with our anti-drone system.

Okay. So just the last question on my side. Since, 85% of our manufacturing is outsourced in India. So what percentage of our components are used as a precision manufacturing like on CNC machines, and how do we ensure quality control in the supply chain for choosing these vendors if there are...

Of course, we have a new vendor development division that goes and actually checks these guys and sees their capabilities. And again, we have very simple technique. Typically worldwide, what people do, they send people to go and check whether the system is there or not, do the test there, or the site -- product comes to their site to the buyers location and they test it there. What we have done is we have given the testing methodology to the vendor. And our guys view from the video online, WhatsApp kind of a thing, they do online checking and they say, okay, guys, it is approved. So rejection rates are very low and the efficiency and the training is -- training of the vendors are helping us in really integrating it very fast. So yes, so we have these simple, simple techniques, which ensure that we get quality products and we are able to -- that's how we are able to monitor. And also when we -- as we speak, we are trying to expand our supply chain for precision, fabrication, everything. And yes, so we're looking to -- so this is how we can integrate very fast.

And our next question is from Mr. Ashish Soni.

Sir, regarding, I think you have good plans for the U.S. So any CapEx requirement for the new plant in Make in America?

So we are -- as we speak, we are estimating it, but it will depend on the location of the factory that we keep, possibly get. We have not yet identified the location. Even though we have an office in Orlando now, we haven't identified the location for setting up the manufacturing. There are many -- so actually, we are waiting for these elections to get over to identify the place where we will be keeping the location. It has to be a very, very careful decision because it can make or break your company if you have set up in a wrong location. So yes, I think the -- again, the cost, we have estimated it should be less than $10 million, maybe about INR 80 crores or so. That will be the total expenditure that may happen for our setup and costs over the next -- maybe for the FY '26.

The last question, what is making you so optimistic about U.S. pitch? Is it like policy like India, we have own IP, best-in-the-class product and anything bureaucratic control, which is getting hopes and just give us some light on that, please?

One thing is that we have gone to the U.S. -- we have been going to the U.S. -- the largest U.S. simulation exhibition for many years. And last year, when we went, they were talking about R&D, for example, one of the products we were talking about was the containerized tank simulators that they want to build in the next 5 years. And they want to finance the R&D for that. And we actually had an online connection to the Indian office, Indian demo center, and we showed it to them that this is the simulator -- tank simulator that the Indian Army is using for the last 12 years. And they were flabbergasted because it was a containerized simulator. They said you have containerized simulators and the -- and India has been using for the last 10 years, and they are planning to use in the next 5 years. So these kind of -- so we felt that this has given us very good confidence. And we have been seeing other simulators also in the U.S. And we think that we have a fair chance, very, very, very good shot at becoming a dominant player in the army simulator there. And again, typically, they don't have a full-fledged solution. So we think that we can not only in terms of product selling, but we are looking also at as other service, can we sell training as a service there, T-A-S, TAS we call it. So these are the factors. Again, why are we confident is because we see that we are very well placed versus the competition what we have in U.S. now.

More point was like in India, the policy change was like IP and Make in India. So is something like that happening in the U.S. I want to understand that piece in the U.S.?

Yes. So I think what they have the Make in America policy, which is I think we ought to understand is 51% should be made in U.S. And we want to very, very seriously comply and maybe do more than that there. Especially, if it makes financial sense to us and try to sell there. But yes, so I think that we'll comply with the existing policy that is there, which is the manufacturing should happen in the U.S.

That was the last question for today. I now hand over to the management for closing remarks.

Adnan, is anybody on the line, in the queue?

Sir, there are 2 participants in the queue.

So let us finish them. We have maybe 2, 3 minutes, we'll just finish it very quickly, yes.

All right.

So next speaker is Mr. Amit Kumar.

So my question is we have INR 1,100 crores cash sitting in the balance sheet. So how much it is used for acquisitions and for CapEx, any bifurcation?

Yes. So our budget has been about INR 400 crores for acquisitions. And CapEx would be less than INR 100 crores. So that's what the plan is...

And the rest INR 600 crores?

So we are looking -- so some of it will be used because of the extreme growth that we are having, I think almost INR 300 crores to INR 400 crores will be used for the working capital requirements.

Okay. After we spent INR 400 crores for acquisitions, how much top line we can expect the same asset turnover ratio or just if you could give some idea?

Afzal, you can take over.

Yes. Yes. So yes, definitely, it will be in line with what you see current parameters of the Zen in terms of revenue, fixed asset turnover as well as return on equity and capital employed, yes, that you can consider.

Okay. And who are the competitors of Zen in anti-drone simulators in India and global scenario?

So again, I think Bharat Electronics Limited in India, it is big anti-drone simulator system manufacturer. So we have competition from them. Globally, there are 3 or 4 players in simulators, for example, Thales, Saab, Cubic Defense Systems and [RUAG], Germany. So these are the -- sorry, not [RUAG] Rheinmetall, Germany is one of the company that has this simulators, which compete with us.

And in anti-drones?

Anti-drones, we have something, Aaronia is one company in Germany that is -- we think that they do very well in terms of aesthetic presentation and we really need to catch up with them. But there are a couple of companies, which is maybe in U.S. and in Israel that are there, but we haven't really seen them competing with us anywhere.

Our next speakers is Rudresh Kalyani.

Did we ever had a product recall?

Product recall means? Yes, we have had -- on one occasion we have had, yes.

Okay. What was the reason? And what are the mitigation measures which we took?

So the reason was that we felt that the customer was being unreasonable and we felt that, that this was a no-go situation impact. We wanted -- sometimes you have to fire your customers. So these are one of those times that we had to fire the customer. And but anyway, so the thing is still not resolved, but we actually kind of said that this is a difficult customer to handle. So that was the reason. Otherwise, the product is a proven product and it's been used by many customers, but this particular customer was very difficult. So in terms of to your question -- when you talk about product recall, you're saying if there, was there any process in the deficiency in the product, which has never been the case of deficiency, but unsatisfied customer we have had.

So you meant to say that because of the ROI, which we were expecting and that customer was too aggressive and he was pulling each of the nickel from us, so we couldn't deliver him?

Yes. So yes, basically, listen, the thing is if -- if you decide not to be happy with the product, you can always keep finding lot of issues with that, it was that kind of a customer, it was, yes.

Okay. Okay. And my final question is, can our anti-drone system be compared to the Iron Dome of Israel or is it entirely different system?

So our thing is if we add the Hard Kill part, then we can create the Iron Dome here, yes.

Next question is from Mr. Anurag Agarwal.

Sir, I just wanted to ask 2 more questions. When do we think we can close the acquisitions? Second, the product recall that we had, this client we fired, what was the size of the order that he had given to us?

So the first one was we can -- again, acquisitions, we are giving it a 1-year time. We hope that we'll be able to do it kind of thing. And yes, the product size, I'm not able to recollect the order size, but I think it was a few crores, not very big, yes.

The next question is from Mr. Vipin Abraham.

Sir, congratulations on a very good set of numbers. Sir, my question is generic. I wanted to ask on simulation. Typically, on simulations, right, just take the case of aircraft simulator, right? Every pilot needs to get trained in a simulator. Given everything actually is becoming autonomous and automatic and so on, right, where you do not need much human intervention, what would you think about the relevance of simulator training in the years to come?

So you are saying versus the aircraft training, what kind of level of training is required in the Army?

No, sir. Aircraft training was an example. I just wanted to ask you that, generally, people needs to get trained, right, in the aircraft simulators, right? And every pilot needs to get trained on that. And just a general example, not typically specific to you. But my question to you specifically is that, given everything is becoming more autonomous, right, with AI and so on, where people may not be even be trained much compared to what it was earlier, what do you think any risk to our business, given that scenario in 5, 10 years down the line as far as simulation is concerned.

So I don't know even -- in fact, we are extreme users of AI for our software, for our target identification, et cetera. So to your question, if it becomes autonomous whether the training would be required. We have not yet seen autonomous tanks being driven anywhere in the world. We haven't seen these things. But eventually, if they happen, I don't know. So there will be still some training required even to operate those autonomous systems is what we think. And again, by the way, we are getting into autonomous system as we speak. The remote control weapon station is an autonomous remote control weapon station. We are getting into robotics. The Prahasta, the robotic dog, it's a robotic dog. We're getting people out of harm's way. So we are taking advantage of the autonomous systems that are coming. And we will be -- as these things evolve, we will be looking at how to respond to those situations. But again, I think we don't see anything happening in the next at least 5 to 6 years in this regard.

As there is no further question, I now hand over to the management for closing remarks. Over to you, sir.

Thank you very much, shareholders. Always a pleasure interacting with existing and potential investors. And I look forward to your continued support. Thanks to all our employees, thanks to the government for being so encouraging and so helpful. And with this, I'll hand it over to [Mehra ] for closing.

Adnan, you can close the call now.

On behalf of Zen Technologies Limited, that concludes today's conference call. Thank you for joining us, and you may click the leave icon to leave the meeting. Thank you for your participation.