Zen Technologies Limited (533339) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and a warm welcome to Zen Technologies Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Abhishek Mehra from TIL Advisors. Thank you, and over to you.

Welcome, everyone, and thank you for joining this Q1 FY '27 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. To take us through the results of the quarter and answer your questions, we have with us today Mr. Ashok Atluri, Chairman and Managing Director; Mr. Hari Haran Chalat, Chief Financial Officer; and Ms. Abhilasha Atluri, Head of Investor Relations. We'll be starting the call with a brief overview of the performance, which will be followed by the Q&A session. With that said, I'll now hand over the call to Mr. Hari Haran Chalat. Over to you, sir.

Thank you, Abhishek. Good evening, and warm welcome to all. Thank you for joining us on our Q1 FY '27 earnings call. I'll take you through our financial performance for the quarter ended 30th June 2026. Consolidated revenue for operations for Q1 FY '27 stood at INR 141.6 crores compared with INR 178.1 crores in Q4 FY '26 and INR 158.2 crores in Q1 FY '26 -- FY '25 -- sorry, FY '26. As communicated in our Q4 FY '26 post earnings investors meeting, a significant portion of the current order book was secured from the second half of FY '26. And given a typical execution cycle of around 12 months, revenue for the year is expected to be weighted towards Q2 and Q3. Q1 has come in as we expected, and we remain on track with the delivery schedules. Operational EBITDA for the quarter stood at INR 38.7 crores at an operational EBITDA margin of 27.3% compared with 28.6% in Q4 FY '26 and 40.9% in Q1 FY '26. Profit after tax for the quarter stood at INR 34.5 crores at a PAT margin of 24.3% compared with INR 31.5 crores in Q4 FY '26 and INR 47.8 crores in Q1 FY '26. I would note that this quarter's consolidated PAT includes a one-off exceptional loss of INR 3.4 crores relating to a fire incident at one of our subsidiaries in which certain inventory, which is adequately insured was damaged. Adjusted for this exceptional item, on a post-tax basis, profit after tax for the quarter would have been approximately INR 37 crores at a margin of approximately 26.1%. I would like to spend a moment on the margin movement this quarter. The margin for this quarter is lower than the guidance of 35% at the EBITDA level, largely due to negative operating leverage. A significant portion of our cost base, both at the stand-alone level and across the group is fixed in nature. On a lower revenue base, this fixed cost absorption compresses the margins. As revenue picks up through the year, in line with our order book execution, the same operating leverage works in our favor. Importantly, our gross margin for the quarter stood at 72.9%, broadly consistent both sequentially and year-on-year. This indicates that the profitability of our business has not changed structurally. The compression at the EBITDA level is largely a function of the operating leverage. Our fixed cost base being spread over lower revenue quarter and not a reflection of any change in the underlying economics of our products. On the year-on-year comparison specifically, I would add an important point of context. Q1 FY '26 benefited from the reversal of certain provisions created in FY '25, amounting to INR 7.65 crores that were no longer required. These provision releases have given Q1 FY '26 an additional margin benefit of approximately 5%. In addition, this quarter has seen an increase in warranty provisions of INR 2.88 crores and incremental R&D costs of INR 4.25 crores. On a sequential basis, our margin of 27.3% is broadly in line with the 28.6% in Q4 FY '26, reflecting a stable underlying run rate. Taking these points together, I want to affirm that the margin this quarter is a function of revenue timing and operating leverage, not of any structural change in the profitability of the business. As revenue scales through the year, we expect margins to recover and to end FY '27 with a full year operational EBITDA margin in the mid-30s, in line with our guidance. Now coming to the order book. The consolidated order book stood at INR 1,239 crores as of 30th June 2026, comprising an equipment order book of INR 920.6 crores and an AMC order book of INR 318.4 crores. I want to address the movement in the order book directly. During the quarter, we executed INR 141.6 crores of orders and secured INR 44.6 crores of new orders, resulting in a net reduction over the March position. Subsequent to the quarter end, we received a further order of INR 177.5 crores from the Ministry of Defense for the upgradation and integration of the tank and crew run simulators. Our pipeline of opportunities across counter and training systems remains strong. On working capital -- our consolidated working capital cycle stood at 257 days as at 30th June 2026. The increase over the year-end position is primarily driven by a buildup in advance to suppliers and inventory, both of which reflect the procurement and production activity currently underway to execute the order book for delivery through FY '27. Debtor days remained stable at 122 days. On the balance sheet, the liquidity position of the group remains strong with cash and bank balances of approximately INR 1,217 crores as at 30th June 2026, and the group remains debt-free. This is a brief on our financial performance for the quarter. We can now take questions.

[Operator Instructions] We are taking our first question now from Balamurali Krishnan of Oman Investment.

First question is on the margins of the weakness -- Y-o-Y dip in the margins, the revenue -- so if you see that the revenue there is a scale up in revenue, then operation leverage will kick in. So as the revenue is almost similar Y-o-Y, what would be the reason for this margin shrinkage?

Thank you, Bala. So, Bala, like I mentioned in my opening comments, in Q1 of FY '26, there were a couple of provision releases, which happened. So if you see the comparison between the selling and other admin expenses, we see a big difference. That's primarily because FY '25 was a year when we execute a lot of orders and we had to create provisions in the balance sheet. And most of the provisions after the balance sheet we released it because they were no longer required. And that has given a picture wherein the EBITDA margin of 40% for Q1 FY '26. Adjusted for whatever provisions have been released, the actual margins for Q1 FY '26 would be around 35%.

Understood. So on the order book front as of now, even if you include this July order, so it's around INR 1,400 crores. So by the end of FY '27, what is your expectation for the order book?

So like we've communicated earlier in our investor meeting as well, our expectation is that we'll end the year at around INR 2,500 crores of order book after the execution for the current year. The pipeline of orders that we are currently evaluating is very healthy. And once the government procurement starts, we should see a healthy amount of this pipeline converted into the order book by end of the year.

On the project front for the next 2 years, we have a target of cumulative INR 4,000 crores of revenue in FY '27 and '28 together. So with this current geopolitical situations and there should be some rush in the antitrems,ose things. So do you see any probability it will get some bigger figures in FY '27 and FY '28?

Yes. I think we should be getting quite a lot of orders we are getting inquiries from our friendly allies, India's friendly allies about this. And given the fact that the product that we have has actually been proven -- battle proven, we have -- the people are -- the government itself, as you have seen that they almost placed INR 800 crores worth of anti-drone orders on us postop Sindoor. And there are a lot of upcoming tenders. We saw that thousands of crores of money has been allocated to them, and there is a lot of tenders are going to come. I think we will be one of the beneficiary of these anti-drone system tenders. And in the meantime, as we have been saying that some simulator orders have been pending. I think the start has happened that we got the INR 177 crores order. I think some more orders will be coming through. We expect that to happen some order to come through pretty soon and one larger order that may take a couple of months, but that should actually improve our simulator order book position substantially. And similarly, the demand is -- even in foreign countries, what has happened is for almost -- these guys were never prepared. They have never had any similar training because it was a peaceful country. But now with all these wars happening, there is almost a rush happening, especially for simulator because that is the only way they can train in a compleed manner and everybody feels that the war is knocking on their door. And we have seen and the technology that we have, we have seen Agniv's 100-week training program was shrunk to 30 weeks after using our simulators. So I think this with the simulators also are becoming very important. And we are trying to get into the -- our traditional markets of Middle East, Africa, Southeast Asia and CIS countries. But now we are also looking very, very aggressively into both North American and EU markets. And of course, in North America, we are tapping into the South American markets. These markets, we think are very, very big. And for example, one estimate is that the simulator -- our -- the TAM for the products that Zen makes in U.S. itself is about $10 billion. That's how huge that is. And we have been -- we have started talking to the marines there to the prime primes because we are not eligible to be directly bidding. So we are trying to be a subcontractor and try to get into those markets. So I think it's a very, very large market, and it's playing out now as we speak that there's a lot of interest. And again, we also have a special position with EU because we make simulators for the Russian equipment. And that's what they would like to actually practice on how do we swap the attacks from possibly Russia kind of a thing. So yes, I think we are in a very good position, and we think the next few months will be very interesting.

So lastly, on this high altitude antidrone system, what is the TAM? And maybe this is India's first one, but maybe in the other parts of the world, it's already existing. So what could be the TAM for -- even if you consider the exports also for this product?

Yes. I think we have just launched. We -- again, we are waiting for this manportable anti-drone system to be evaluated by the armed forces. And we think that it's a very, very large market. And the fact is that -- but again, this has -- government has to publish the tenders. And we expect that there will be some tenders in this regard. And -- but we don't have a real estimate at this. But the government is across the whole gamut of simulators, they're starting from actually water-based, then they're going to tank, then they're going to. So I think it's a very large market, and I'm not able to give a right figure, but it's going to be very large.

Okay. Just a follow-up on that one may I ask. So if we come up with some new product, which is useful for our defense system, so how we exhibit that product to the government so that they can think from their operation point of view and maybe they can understand the significance of this product, then they can place the think of tendering of these...

Yes. I mean it's a valid question in the sense that whatever product we are developing, we actually are continuously engaging with the arm person telling that this product is available. And then with this new defense acquisition procedure, if that comes in, they actually have provisions for actually buying new products and then trying it out and then scaling the order. They don't -- they will not even -- they will probably see a basic trial and say, okay, we want to try it out in the field. And if it works in the trail, they'll do it, they'll scale up. That's the new BAP 2026 yet to be announced, but in the draft, this was there. So I think -- but to your question, yes, as a market as a company, we do continuously keep telling our customers, what exactly we are developing and what is the future development path. And they do know what we have developed much in advance than we actually share with our other stakeholders.

We'll take our next question from [ Pawan Panjabi ] of [indiscernible]

I just wanted to check on the simulator market once because we've not been growing into the -- so I have been following this for a while now and seemingly the number of armed forces which are using simulators is very less in India. That itself was supposed to grow exponentially. So ex of anti-drones also, we do not see simulator orders also performed very well in the last 1 or 2 years in terms of growth rate. So how do we see this market only from the Indian perspective?

Yes, Pawan, so the thing is, again, I was telling that the order that we got recently of INR 177 crores for simulators and there is another -- we had talked about almost INR 700 crores to INR 800 crores worth of order that is actually playing out now. We expect the more simulator orders to come as we go into the next couple of months. I mean, again, I have been talking like this for a long time. But actually, I think one order has come, I think the second order may come. Maybe the third order may take a bit of a time, but that will also come. I think the simulator market is expanding. And now in the future, we are thinking now we actually -- we have got into the slight simulators also, as you saw in the presentation, that we have got into flight simulator. We have made a simulator for CU295. So the Air Force entry is a very crucial step for us where the simulators are very, very required even for a regular practice, the simulators, every pilot has to clock certain number of simulator hours to even fly. So we are getting into that also. But as far as the army and naval marketing, which we are dominant, these are very big. And as we speak, there are a lot of studies that have come out and that are again telling the government that you should get into simulators and the government is actually really increasing the simulator budget. I think there has been a gap in the orders to come. But again, we have started getting the orders. I think this will be the start. And as we go into the future, I think there will be some pleasant surprises. I think there are some couple of very large orders we are expecting. So I think overall, I'm happy with the way the simulator thing is going. Of course, I wish that the government moves faster. Yes. Please go ahead, yes.

Just to put a number to it, so we are expecting some INR 4,000 crores of revenues for the next 2 years. In your estimate, what should the simulator number be out of this INR 4,000 crores guidance -- it will be...

No, it will be about INR 2,000 crores, close to that.

Okay. That's what we are expecting with some pleasant surprise probably in Q2 and Q3.

Yes, yes. No, no. The order wise may take a little longer, the very large order we are talking about. But these -- I was talking about the -- we some time back said that INR 700 crores to INR 800 crores worth of orders were in the pipeline. So I think those may materialize much, much sooner than Q2, Q3, yes.

A little bit of update probably on the HyperStrike. I read that this is -- this sort of area is being probed by multiple peers out here and the timing is more critical in terms of this long-range strike drones of the market of the strong. So where are we? And are we on track to get this by FY '28?

So yes, we are -- the product is -- has been demonstrated in the sense that the payloads, et cetera, integration is going on. But this is a long-range thing. This is what we call it as -- even it does -- it goes very, very fast. So we recently were doing -- we have actually flown at 300 very comfortably. But now we are really testing the limits of physics and the thing. And with the payloads and all that -- so it is when the drone -- the drones are actually very near, we try to send it. The range typically would be within 20 kilometer range, we go and destroy the incoming Shahed kind of a drone. So that is what this HyperStrike, it is a interceptor drone. So yes, it is meant for -- yes, so this is at a short range, it does it, but it goes very fast. Even if it misses, it chases and it actually destroys the incoming drone. That's what the interceptor drone does. And I think this will make us completely safe from so-called Shahed drones, which ours enemies have.

So I believe there was one interceptor drone by Paras launched very recently. How do we stack up against them?

So I'm really not aware of what they have launched, but we -- again, our product is completely in-house. We have developed the technology completely in-house. But I'm really not aware of that Paras, somebody, some of the subsequent speaker can just tell us the details, then maybe that would be of interest. But what we are developing is, I think, absolutely on the cutting edge, very fast, very reliable and very reasonably priced.

We have Akshay Kaila of AK Investment.

First of all, congratulations for introducing new product line recently on the Vijay Diwas. So sir, my first question is about the -- as you have said that in U.S. Zen Technologies addressable markets are like $10 billion for all of our products. So what gives us the right to win in that strict regulatory market? And how are we preparing ourselves for that type of market?

Yes. So in the sense that very frankly, the market size is very large, but U.S. is one of the very closed markets and very difficult for Indian guy to actually -- Indian company to go and sell there. So we are -- how are we approaching is that first, we are trying to get all the compliances done. They are very heavy strict compliances. And I think they should be there because they are letting themselves -- letting a foreign company into their ecosystem through the clearance, I clearances, all those clearances are going on now. And once they feel comfortable with us, then that is when they will actually let us bid directly. But as of now, the strategy is that we should align ourselves with the prime vendors. If somebody wants to come to India, they would try to align with them and try to sell it through -- maybe we don't do that much, but there is a real high-tech company, we would like to collaborate with them and offer arm forces. But similarly, in the U.S., we are looking for companies that want to actually do something for us and have the access to the customer while we have the product and we want to collaborate with them and supply. So this is the market that we are looking at that we expect some orders to come through. Again, this will not be very large, even though I said $10 billion is for the next 3 years, actually, that is the market size. But we have a very modest ambition that even if we touch $100 million in the third year, we should be very happy with that result. But it's a long-term game, and we expect -- given the fact that our products are very well received in exhibitions in U.S., we expect that some breakthrough may happen. But if luck favors, it may be much, much larger breakthrough. But as of now, I think a year or 2, there's nothing -- no big news from U.S. as such or the EU, but maybe third year onwards, something may happen there.

And sir, my second question is about our solutions. So we already have the stronghold in Army solution, right? So what are we developing in the Navy and airports? And can Navy and airports be the same addressable market and growth for Zen Tech's Army in the coming months and years?

Yes. I think Navy is a very big market because the very fact is that even though we are obsessed with our East and West border, which is shared by our lovely friends, we have the rest of the whole Peninsula place, which is completely unguarded. And that is where the next game is being played, power game is being played, which is the Indian Ocean. And so how do we actually control that without being trained. So in terms of training simulators, there is going to be a very, very large market. And I think a lot of sea-related products are also going to see -- we have a lot of demand, even though we are not much into that. But I think naval simulators are going to be very, very big, and they want to train. And how do you actually to see certain kind of situation. For example, I see a swm of drones coming and attacking me. How do I actually simulate that? So if I really want to practice, I cannot practice in reality. It has to be through simulation. -- if 100 drones are coming, how do I neutralize the 100 drones. -- on a ship or forget about ground. So all these things have to be practiced before the things happen, and they are not very far away, 100 drones coming and attacking a ship or even army post or something. So we have a drone and counter drone simulator where the drones actually simulate the forms being sent and counter drone simulators, the operator is struggling, how do I utilize how work with the order, what hard kill off do I activate. All these actions have to be taken. And this cannot be done in practice except to simulators. And we have those simulators. I think, yes, for Navy also, these counter drone simulators are there. Of course, we are very well entrenched in the submarine, the tactical trainers. We have the bridge simulators, the engine room simulator, et cetera. So we all have those simulators, which is, again, a very, very big and growing market. Yes. So I think we are there. And of course, now we have made -- we are trying to push our solutions into Air Force. And we think that there is a huge demand for the Air Force simulators also, but we have yet to get some orders of any indication of participation tenders in that regard.

Okay. So on the Navy front, do we have any developed products till now? Or are we in the progress of developing the product?

Naval simulators we have. We have a lot of those simulators. In fact, if you just go to the website, AI simulation website, you will see that we have for the -- almost for all kind of simulators. And with capability, we are giving weapon simulators for the navy ships also. So we have the complete range available bridge simulator, tank simulator, submarine simulator, so naval simulators, we have a whole range. So I think we may be -- we have the most exhaustive range in the world. Nobody else has like Army. It's in the Air Force that we just recently started.

Next question is...

Akshay, sorry about this. Yes, you see if you can rejoin. We are taking our next question now. We have [indiscernible] Global. [Operator Instructions]

Sir, just one basic question with regards to anti-drone system. The speed at which the drones are being flown, I suppose, from 240 kilometers per hour or 300 kilometers per hour to 600 kilometers per hour. In that scenario, our anti-drone system, if it is the parameters are, let's say, radius of 5 kilometers or 6 kilometers, how can they intercept and stop?

So, there are different ways of stopping the drones. One is, number one, that are they being controlled from the ground is there a ground to drone communication happening, in which case, we will be using the jamming system. We'll just jam the system, and we will be able to stop the communication with the stop communication stop, typically, what happens is the drone itself gets lost and say either it lands itself wherever it is or it goes back to the home station. So we have neutralized the threat. In case it is coming autonomously using the GPS thing, then what we do is we try to spoof the GPS and say that you are not in India, you're probably in Pakistan or Balochistan or whatever. And then it gets again disoriented and the same thing -- same 2 things happen, back to home or land where it is. Third is the -- where they use autonomous AI-based intelligence in the sense that what happens is the drone has the complete topographical map and the camera keeps taking the live photograph and tries to match and says, okay, I'm in this location, I have to go in this direction. Without -- even if we jam, it doesn't work. In those cases, the only way to destroy them is through actual hard system, weapon system, it could be -- typically, you can either shoot them down, very difficult to shoot at the speed you are saying. But the only possible way to block them is to interceptor drones. That is what we are doing. So we should be able to neutralize the incoming interceptor drone with that. So I think interceptor drones are the solution, but the people are making this HPM-based high-power microwave-based solutions are there. We have a laser solution that we are offering to the armed forces. So depending, it will be a combination of solution, how do you actually jam the thing. So it is the challenge at 600 kilometers, it will become a challenge, but I think we are coming up with a solution for that. But at a lower speed of up to 400, we can handle the set of drones. But actually drones flying more than 400 kilometers are very, very few, but we will be coming up with a solution for that.

Ashit, do you have any other question? [Operator Instructions]

Yes. Basically, sir, my question, why this was? Because when I am having drones flying from the opposition side, which is, let's say, 300 kilometers inside and from there when they are flying. So by the time they reach the borders, I have very less amount of time to kill them or confuse them or scoop them as you say. So in that scenario, a combination of your drones and anti-drone system, does it involve UAV whereby your UAV would be kind of be there in the air and also identifying those flying drones well in advance and then using your technology of spoofing and other things.

Yes, that is right. Once the drone is detected on the radar, the action is typically dictated in collaboration with AI. AI will actually tell you this is the spear that's coming. This is the solution that you have. And man in the loop when it has to initiate the hard kill, they will immediately say that, okay, immediately let me launch a UAV or I can destroy it with a particular type of a weapon. That decision will be authenticated by the man in the loop because for any kill, hard kill, the human element will be there. And they say yes to the suggestion and the drone goes and contacts the drone immediately. So what you are saying is, listen, they're flying at 5 kilometers per minute. So at 300 kilometers, that would be the speed. They're finding can we really stop them? Yes, we can stop them. The answer is we have the solution for that. At that speed, we can definitely send our counter drone systems, and we can -- the UAV is much faster than that. Wherever it is coming, it is being detected at a probable distance of 100 kilometers or so. So we are talking about 20 minutes to recharge. So can we stop in between? Yes, my answer is yes, we can do that.

That would decide our market -- overall market size. Market size of entry...