This smallcap defence stock has tanked 33% in 3 days on weak Q3 results

Shares of Zen Technologies locked in lower circuit for the second straight day, down 10 per cent at Rs 971.50 on the BSE in Tuesday's intra-day trade

Zen Technologies shares locked in lower circuit for the second straight day, down 10 per cent at Rs 971.50 on the BSE in Tuesday’s intra-day trade with only sellers seen on the counter. In the past three days, the stock price of this smallcap defence company has tanked 33 per cent after it reported a weak set of numbers for the quarter ended December 2024 (Q3FY25). In the past one month, it has plunged 58 per cent.

 

The exchanges revised the circuit limit of Zen to 10 per cent, from 20 per cent earlier, which will take effect from today. Till 10:09 am, a combined 2.13 million equity shares of the company had changed hands and there were pending sell orders for 320,000 shares on the NSE and BSE. The BSE Sensex was trading flat at 76,000.

 

 

Zen is engaged in designing, developing, and manufacturing state-of-the-art simulators. The company primarily caters to training simulators for police forces, anti-drone systems, and paramilitary and armed forces, along with government departments in sectors such as transport, mining, and infrastructure, as well as the civilian market.

 

Zen has underperformed the broader market indices on concerns related to growth visibility, order inflows, and acquisition plans.

 

In Q3FY25, Zen Technologies reported a 22 per cent year-on-year (Y-o-Y) rise in standalone profit after tax (PAT) at Rs 38.62 crore as against Rs 31.67 crore in Q3FY24. On a sequential basis, the company's net profit declined 40.8 per cent from Rs 65.25 crore in Q2FY25. The company's earnings before interest, tax, depreciation and amortisation (Ebitda) margin contracted to 35.90 per cent in Q3FY25 from 47.34 per cent in Q3FY24.

 

While Zen experienced a rise in profitability due to higher other income in Q3FY25, the management said it expects to achieve Ebitda target of 35 per cent by the end of the current financial year.

 

Revenue from operations, meanwhile, grew 44 per cent to Rs 141.52 crore from Rs 98.08 crore in the year-ago quarter. The management said the company is on track to meet its stated guidance of Rs 900 crore revenues for FY25.

 

The company expects inflows worth Rs 800 crore to materialise during Q4FY25-FY26, which will provide revenue visibility beyond FY25. It maintains its revenue guidance of Rs 900 crore for FY25, with an Ebitda margin of 35 per cent, despite a miss on revenues for Q3FY25. Further, it is building its portfolio across other simulators with the recent acquisition of Applied Research International Private Limited (ARIPL), which is engaged in naval simulators, apart from MoUs and tie ups with other firms for air-based simulation solutions.

 

Due to lower-than-expected order inflows in 9MFY25, Motilal Oswal Financial Services (MOFSL) cut its estimates by 4 per cent/25 per cent/22 per cent for FY25/26/27. Along with this, target multiple has also been revised downwards, as the company was earlier getting a higher valuation multiple for growth, which is looking weak till FY26. Beyond FY26, the brokerage firm expects overall ordering to improve from large-sized simulator orders, recent acquisitions, and MoUs, as the company’s overall capabilities are being enhanced across simulators, anti-drone, and other new areas. However, due to delays in the finalisation of tenders, execution may remain impacted in the near-to-medium term.

 

A slowdown in procurement from the defence industry, especially for simulators, can expose the company to the risk of further reduced order inflows and hinder its growth, MOFSL noted.

 

The company is also exposed to foreign currency risks for its export revenue. High working capital can also pose risks to cash flows, as historically, the company’s working capital has remained high due to issues related to high debtors and inventory. This is likely to come down due to improved collections and lower inventory, according to the management. However, any delays in the same can affect cash flows for FY25/26, the brokerage firm said.