Zen Technologies awaits 2HFY27 execution ramp as simulator orders strengthen growth outlook

Investment View and Valuation

Motilal Oswal Financial Services Limited retained its Neutral rating on Zen Technologies in its July 27, 2026 results update after a weak 1QFY27 performance. The broker maintained its target price at Rs 1,600, based on 30 times September 2028 estimated earnings. At the report CMP of Rs 1,690, the target price implied 5 per cent downside.

The principal re-rating triggers are stronger order inflows and a visible improvement in execution, particularly in 2HFY27.

1QFY27 Financial Performance

Zen Technologies reported standalone 1QFY27 revenue of Rs 1,030 million, down 7 per cent year on year and 6 per cent below MOFSL's estimate, reflecting lower-than-expected execution. EBITDA declined 26 per cent year on year to Rs 282 million, 9 per cent below the broker estimate.

EBITDA margin fell to 27.4 per cent from 34.3 per cent in 1QFY26, despite gross margin increasing to 65.7 per cent from 55.1 per cent. Adjusted PAT declined 21 per cent year on year to Rs 292 million, compared with the broker estimate of Rs 333 million.

Margin Outlook and Execution Recovery

Management attributed the lower margin primarily to negative operating leverage arising from lower absorption of fixed costs. Margins were also affected by the absence of Rs 77 million of provision reversals recorded in 1QFY26, higher warranty provisions of Rs 29 million and incremental R&D expenditure of about Rs 43 million.

Management reiterated its expectation for a mid-30 per cent EBITDA margin in FY27, with execution expected to improve through 2QFY27 and 3QFY27.

Order Book and Growth Outlook

The consolidated order book stood at Rs 12,390 million at June 2026, including Rs 9,200 million of equipment orders and Rs 3,200 million of annual maintenance contract orders.

The standalone order book was Rs 11,388 million, up 88 per cent year on year. It comprised about Rs 8,400 million of equipment orders, with anti-drone systems accounting for 55 per cent and simulators for 34 per cent, along with roughly Rs 3,000 million of AMC orders.

After the quarter, Zen Technologies received a Rs 1,800 million Ministry of Defence order for tank and crew gunnery simulator upgrades and integration. This took the executable consolidated order book to about Rs 14,200 million.

Management expects the order book to reach around Rs 25,000 million by the end of FY27, supported by simulator and anti-drone opportunities. Simulator orders worth Rs 7,000 million to Rs 8,000 million remain in the pipeline. The current order book typically has an execution cycle of around 12 months, with execution weighted towards 2HFY27.

Export Opportunities

Management expects exports to become a more material growth driver amid higher global defence expenditure and demand for training simulators and anti-drone systems. Zen Technologies is expanding beyond the Middle East, Africa, Southeast Asia and CIS countries into North America and Europe through established defence-contractor partnerships.

Management cited a US simulator addressable market of about US$10,000 million over three years and targets approximately US$100 million of US revenue by the third year.

Vector Technics and Capital Allocation

Vector Technics, Zen Technologies' drone-propulsion subsidiary, has expanded capacity to about 300,000 propulsion units. Nearly half of recent enquiries were from overseas markets, although industry-wide drone-procurement delays have constrained near-term inflows.

At current capacity utilisation, Vector Technics could generate annual revenue of Rs 1,000 million to Rs 3,000 million, depending on order conversion. Zen Technologies is also assessing acquisitions using its debt-free balance sheet, cash of about Rs 12,200 million and residual QIP proceeds.

Estimates and Key Risks

MOFSL broadly maintained its estimates and forecasts standalone revenue, EBITDA and PAT CAGR of 60 per cent, 67 per cent and 54 per cent, respectively, over FY26-FY29E. The broker expects EBITDA margin of about 36 per cent during FY27-FY29.

Key risks identified by the broker are:

• Slower defence procurement, particularly for simulators, could reduce order inflows and impede growth.
• Foreign-currency exposure arising from export revenue could affect performance.