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Zen Technologies Ltd.

BSE: 533339 Sector: IT
NSE: ZENTEC ISIN Code: INE251B01027
BSE 00:00 | 27 Jul 97.30 3.80
(4.06%)
OPEN

95.00

HIGH

98.40

LOW

92.00

NSE 00:00 | 27 Jul 97.25 3.70
(3.96%)
OPEN

94.20

HIGH

98.30

LOW

92.05

OPEN 95.00
PREVIOUS CLOSE 93.50
VOLUME 121395
52-Week high 106.85
52-Week low 49.75
P/E 173.75
Mkt Cap.(Rs cr) 774
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00
OPEN 95.00
CLOSE 93.50
VOLUME 121395
52-Week high 106.85
52-Week low 49.75
P/E 173.75
Mkt Cap.(Rs cr) 774
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00

Zen Technologies Ltd. (ZENTEC) - Chairman Speech

Company chairman speech

Director’s Overview

Overview

Strengthening my view last year the Indian defence procurement is moving decisivelytowards encouraging indigenization. It is favourably transforming the prospects ofcompanies like Zen that have spent huge amount of resources on R&D and have createdworld-class products with complete ownership of IP. Zen had to pay costs in terms oflesser short term profits in search of long-term sustainable advantages. We a re reapingthe benefits now.

Orders from the Indian Government will continue to be lumpy but a decisive journey hasindeed begun. Going ahead the volume of Defence procurement from the private sector isonly likely to grow and will be spread across a wider range of products. The stress on agrowing proportion of indigenous content in systems/sub-systems being procured isheartening news for research-driven players like Zen.

The principal message that I wish to communicate is that Zen Technologies isattractively placed to capitalise on the watershed moment in transformation of India fromthe ignominy of being the largest importer of defence equipment to an aspiring definitiveand large player in the defence exports market. The support from Indian Govt will make itpossible. Ignore the negativities being felt the reality hasn’t been morecomfortable for Zen until now.

Positioning

Over the years Zen selected to specialize in the security training solutions nichethat is core to the security preparedness of any country – few meters wide but amiles-deep positioning which is in contrast to the inch-deep and mile-wide strategy ofother Defence players. In line with the Zen philosophy of less is more the Company willcontinue to focus on training solutions. We have also developed some other products likeShootEdge that fulfil the operation needs of Special Forces. Application of AI techniquesincluding Adaptive Learning technologies in training solutions will help our customerslearn smarter and faster.

The result of a proactive research-led investment approach is that Zen is among ahandful of global companies that can provide holistic fullfledged cutting-edge solutions.

Governance

Zen recognises that it is engaged in a business where its principal customer is thegovernment; it is in the critical business of combat readiness against internal andexternal threats that a country might face; the e3 ectiveness of its solutions helpsprotect the lives of millions.

Over the years the Company strengthened its governance through a long-term mind setfocus on processes and systems as the basis of its working placing a premium on customersatisfaction and confidentiality strengthening the technocrat-driven environment withextensive investment in research investing in the quality-enhancing practices of itseco-system strengthening its Board of Directors protecting the integrity of its BalanceSheet and communicating its story transparently to the shareholders and otherstakeholders.

Customer value

Zen provides value to the customer by stressing "to bleed less in war sweat morein peace" by training. The value of Zen’s combat training is beyond doubt. Weunderstand from an o3 cer that simulators bought from Zen for around Rs. 100 Croresresulted in the savings of about Rs. 3300 Crores. But even after such savings Zenhasn’t got as many orders as we would expect.

Integrated individual and team training is an ind is pensable requirement for allsecurity forces. The right solution is a technology-driven Combat Training Centre solutionthat can be customised around specific customer needs. Zen provides a range of solutionsfor its customers – Indian armed forces state police forces and paramilitary forcesas well as their counterparts in other friendly countries. The result of our promptservice sustained improvements and continuous support provided through the productlifecycle is what customers prefer and why they engage with us on long-term basis. Anunusual feature in a space generally very transactional by nature.

Global market

The push being provided by the Indian government continues to transform the opportunitylandscape for Zen. The Company is actively engaged in many countries with large ticketssize and chance of they engaging Zen for their training solutions - this is the result ofa carefully thought out exports strategy. The vast exports potential is expected to yieldsome very large orders in the near future.

During the year under review the wholly-owned subsidiary in US along with its CEOPratish Shah continued to reach out to prospective customers across the US and itsfriendly countries. The response has been very encouraging and we expect some small ordersto come our way as an auspicious beginning soon.

Zen India continues to focus on the growing opportunities arising out of India theMiddle East CIS and Africa. Besides the Company is engaging with small countries wheresolutions like combat training centres are being welcomed and Zen intends to fill thisniche. This will be achieved by providing superior technologies at a price pointacceptable to customers. We are also looking at attractive financing options includingEXIM Bank where the customer needs it. The Company will ride the wave of growing globalcredibility of Indian Defence vendors with active government support.

Indian market

Two significant changes that he single-handedly introduced in the Defence ProcurementPolicy of 2016 are Buy India (IDDM) and Make II initiatives. On the export front late MrParikkar while inaugurating Foreign Defence Attaches conclave in Delhi said that Indiawas an erratic market and all indigenous defence equipment innovators should protectthemselves by diversifying through exports. The policy set by him will take India into theposition of leadership in the coming decade. Two-minutes of silence for the greatestDefence Minister that India ever had.

Consequent to the changes initiated by him the government had relaxed the need for anyequipment to have at least three vendors. The exception is when the Indian vendor hasdeveloped the intellectual property through in-house research they are willing to buythrough single-vendor situation; it is also receptive to innovative products being shownto the Indian forces. The Indian defence innovators are now slowly developing confidencein the system to invest in new product development and productisation. Research-driven wehave our strengthened a business moat through proactive investment in R&D.

The Company provides a family of more than 40 products and has filed more than 93patents till date. These patents help us protect the R&D and help us in doing furtherresearch while helping us address the training needs of an army and internal securityforces comprehensively. The Company’s research commitment was validated through aninvestment of Rs. 65 cr+ across five years (around 20% of revenues) ending 2018-19 aperiod when the sectoral cycle was relatively depressed.

IP-Play

The world of products is divided into pure hardware to pure software. By pure hardwareI mean hardware with no IP content like nuts and bolts where the bill of materials isalmost equivalent to the selling cost. The margins in it are very very slim. And then takecloud-based software on the other end where the bill of materials and true variable costsare almost zero and the sales are all contribution. Zen is attractively biased towardsthe software end of the spectrum. Most of the hardware that we need to supply to thecustomers though designed and prototyped in-house is outsourced for manufacturing.Therefore the plant & machinery investment required for incremental orders is almostnon-existent. Over the years the Company has strengthened its business around suchasset-lightness. This approach makes it possible to ramp up its production with reasonableflexibility without a corresponding increase in the capex. The Company’s businessgrowth has been facilitated by a robust eco-system of component and sub-system vendors inand around Hyderabad. More than 85 per cent of the Company’s manufacturing functionscan be outsourced transforming a fixed cost into a variable expense. Besides thisdependable eco-system possesses adequate spare capacity making it possible for theCompany to accept large orders while protecting customer schedules.

Annuity revenues

Our niche market is distinguished by its lumpy revenues. At Zen we recognise that suchlumpiness can severely impact company’s liquidity when order inflows are low. Overthe years the Company strengthened revenues derived from annual maintenance contracts.These AMC contracts provide the Company with annuity revenues derived from product salesmade in the past. While only a subset of customers enter into AMC contracts they canpotentially generate revenues equivalent to around 120 per cent of the initial productsales value generally extended across a 10 to 15 year horizon. The Company is progressingtowards a critical mass of AMC revenues to adequately cover the fixed costs to sustain. Inaddition we at Zen have been relentless at eliminating unnecessary costs and spendingmore on profit generating expenses.

Optimism

The global addressable market of more than USD 8 bn on the one hand and a relativelylow supplier presence because of huge entry barriers provide a large sustainable businessopportunity. As the world invests more in training and preparedness preferringeco-friendly and e3 ective methodologies over crude and environment destructive trainingmethodologies the market for our products will only increase.

While the performance of the company for FY19 has been adequate we expect the numbersof FY20 to far outstrip this performance both in terms of top-line and bottom-line. Andbased on the sales funnel and the aggressive promotion of Indian defence industry by theGovt of India we expect the coming years to be the best for Zen. And as usual we tendto put our money where our mouth is.

Ashok Atluri

Chairman and Managing Director

Zen Technologies Limited

.