4QFY16 Result Review (Wholly owned subsidiary of Bank of Baroda)

Ze

BUY $CompanyN ame$

Sector: IT Software Products

Zen Technologies Ltd. (ZEN)

2nd June, 2016

Betting on change in DPP policy; Maintain BUY

Price

Price Target

ZEN reported 4QFY16 results with a revenue of Rs 76mn vs Rs 646mn in 4QFY15 a de-growth of 93% YoY led by no orders from Indian defence. Currently the company has an existing order book of Rs 900mn (mainly from AMC’s which is to be executed over next four years) ZEN is also in talks with state police and army for ~Rs500mn orders. EBITDA loss stood at Rs 67mn vs profits of Rs 357mn in 4QFY15.

Rs. 66

Rs. 83

Company continue to invest in R&D: ZEN is a R&D driven company, where the company has to invest huge on R&D to keep themselves updated. In 4QFY16 the company spent Rs. 50.8mn vs Rs 36.35 in 4QFY15 a YoY growth of 45% on R&D. The company has a policy to book R&D expenses as revenue expenses which has led the toll on the EBITDA margin. The company expects to spend ~Rs 150mn (+/-10%) over next few years.

Promoters

59.44

Public

40.56

Order book expectation: ZEN is into manufacturing of training simulators especially for military, paramilitary forces and state police force. Being the nature of business, the company’s revenue is dependent on the orders received by these institutions. ZEN has already bided for ~5-6bn orders from Indian military. The bid did not progress due to pending DPP policy. Now the government has announced new Defence Procurement Policy (DPP) which will enhance the chances of a company to receive these orders. We expect ZEN being the integrated player has enormous opportunity to get sizable order in this space. ZEN is also tapping export markets, where it expects orders to flow from 2HFY17 onwards.

Sensex

26,843

52 week high/low

135/58

The lumpiness in order book will remain in case of ZEN, however, we are positive on the company to get the orders sooner or later. We expect, Zen’s revenue to grow at a CAGR of 38% over FY16-18e led by 1) Proposed orders from Indian armed and state police of ~ Rs 5bn in near future, 2) prospective export opportunities, 3) Zen may capture a substantial portion of the expected Rs 60bn unexplored simulation market. Valuation: At CMP of Rs 66, the stock trades at PE of 219.7x/30.7x/23.7x of FY16p/17/18e respectively. We maintain our BUY rating and a target price of Rs 83 (30x of FY18e; increasing our target PE led by optimism by clearance of DPP policy).

26

Bloomberg Code

Reuters Code

ZEN. IN

ZETE.BO.

Share Holding (%)

As on 31st March, 2016

Stock Data Nifty

8,219

Maket Cap (Rs. bn)

5.86

Price performance (%)

1M

3M

6M

1Y

Absolute

-17.1

-5.3

-28.5

-13.6

Relative to Sensex

-22.7

-16.0

-31.2

-12.4

Relative Performance 250 200 150 100

Zen Technologies

Oct-15

Sep-15

Jul-15

Aug-15

Jun-15

May-15

Apr-15

Mar-15

Jan-15

Feb-15

Dec-14

50 Nov-14

New proposed Defence Procurement Policy (DPP); a game changer: The new proposed DPP is the introduction of the new category called Buy IndianIndigenously Designed, Developed and Manufactured (IDDM). Under IDDM category, if the product is designed in India and 40% of the equipment has indigenous content in it or If 60% of the content is indigenous, and even if the design is not owned by Indian company, it will qualify for bid. This will help huge inflow of funds in R&D. The new DPP ensures that even if single vendor situation arises at bid stage, the procurement will be concluded, if the product qualifies and due process is followed vs earlier two vendor compulsion for bidding. We expect DPP to be effective from FY17.

Up/Down (%)

BSE Sensex

Source:-Bloomberg

*Risk to our view- ZEN mainly deals with government bodies for procuring the orders; any delay in procurement of the orders may delay our investment thesis.

Exhibit 1: Financial summary (Rs mn) Y/E March

FY14

FY15

FY16p*

FY17e

FY18e

Net sales

464

785

526

803

1001

Growth (%)

24.8

69.5

-33.0

52.7

24.6

1.3

26.6

3.1

31.0

31.3

PAT

1

157

23

166

215

Adjusted PAT

1

157

23

166

215

0.1

2.0

0.3

2.1

2.8

Growth (%)

-98.5

22842.3

-85.3

615.1

29.5

P/E(x)

742.2

32.4

219.7

30.7

23.7

ROE (%)

0.1

15.0

2.1

14.7

17.6

ROCE (%)

1.7

13.1

2.6

13.8

16.1

0.17

0.35

0.33

0.33

0.30

0.5

0.5

4.5

0.4

0.4

Operating margin (%)

EPS (Rs)

Debt/equity (x) P/Bv (x) Source: Company, BOBCAPSe

p*-provisional

Vaishali Parkar Kumar | [email protected] | +91 22 6138 9382

Zen Technologies Ltd. | 2 June 2016

(Wholly owned subsidiary of Bank of Baroda)

Exhibit 2: Quarterly Financials (Rs Mn) Net Sales Raw material consumed (%) of net sales Staff cost (%) of net sales Manufacturing & Other Expenses (%) of net sales EBITDA Depreciation EBIT Interest Other Income PBT Less: Taxation Less: Minority Interest Recurring PAT Exceptional items Reported PAT EPS

4QFY16 76 23 29.6 15 19.7 101 132.0 -67 8 -75 1 18 -58 -12 0 -45 0 -45 -0.6

4QFY15 646 177 27.3 25 3.9 79 12.3 357 7 350 8 9 351 41 0 310 0 310 4.0

YoY (%) -93.1 -99.2 -38.2 -22.6 110.2 111.8

109.6

108.6 108.6

3QFY16 45 1 3.1 16 34.9 61 137.9 -37 5 -41 7 14 -34 -7 0 -27 0 -27 -0.3

QoQ (%) 71.5 1,546.0 -3.1

83.5 81.0

71.4

71.0 71.0

Source: Company, BOBCAPS

| Equity research |

2

Zen Technologies Ltd. | 2 June 2016

(Wholly owned subsidiary of Bank of Baroda)

Financials Exhibit 3: Income Statement Y/E Mar (Rsmn) Net sales growth (%) COGS Staff Cost R&D Cost SG&A Cost EBITDA growth (%) Depreciation EBIT Other income Interest paid Extraordinary items PBT Tax Minority interest PAT Non-recurring items Adjusted PAT growth (%)

FY14

FY15

FY16p*

FY17e

FY18e

464 24.8 129 61 149 119 6 (87) 16 (10) 36 25 1 0 1 1 (99)

785 69.5 243 72 131 131 209 3,320 23 186 33 21 198 41 157 157 22,842

526 (33.0) 147 62 143 157 16 (92) 21 (5) 55 21 29 6 23 23 (85)

803 52.7 225 45 137 148 249 1,421 23 226 41 55 212 46 166 166 615

1,001 24.6 278 55 170 185 313 26 23 289 43 58 274 60 215 215 29

Exhibit 4: Balance Sheet Y/E Mar (Rsmn) Cash & Bank balances Other Current assets Investments Net fixed assets Goodwill Other non-current assets Total assets Current liabilities Borrowings Other non-current liabilities Total liabilities Share capital Reserves & surplus Shareholders' funds Total liabilities

FY14

FY15

FY16p*

FY17e

FY18e

420

376

680

594

685

305 498 59 1,282

875 477 47 1,775

361 1 591 36 1,668

643 1 443 36 1,716

771 1 445 36 1,937

123 169 5 297

267 389 9 665

162 373 9 544

196 375 9 580

225 395 9 629

77 908 985 1,282

77 1,033 1,110 1,775

77 1,047 1,124 1,668

77 1,059 1,137 1,716

77 1,231 1,308 1,937

Source: Company, BOBCAPSe p*-provisional

| Equity research |

3

Zen Technologies Ltd. | 2 June 2016

(Wholly owned subsidiary of Bank of Baroda)

Exhibit 5: Cash Flow Statement FY14

FY15

FY16p*

FY17e

FY18e

1 48 171 219

157 15 (411) (239)

23 23 420 466

166 21 (248) (61)

215 23 (99) 138

Capital expenditure Change in investments Cash flow from investments

(223) (223)

7 7

(137) (1) (137)

127 127

(25) (25)

Free cash flow Issue of shares Net inc/dec in debt Dividend (incl. tax) Other financing activities Cash flow from financing Inc/(Dec) in Cash & Bank bal.

(4) (12) 46 (1) (75) (42) (46)

(232) 220 (73) 41 188 (44)

329 (16) (5) (5) (26) 303

66 2 (33) (120) (151) (86)

113 20 (43) 0 (23) 90

Y/E Mar (Rsmn) Profit after tax Depreciation Chg in working capital Total tax paid Cash flow from operations

Exhibit 6: Ratio Analysis FY14

FY15

FY16p*

FY17e

FY18e

EPS

0.1

2.0

0.3

2.1

2.8

CEPS

2.2

2.3

0.6

2.4

3.1

DPS

1.2

4.1

0.1

0.4

0.6

127.7

143.9

14.6

147.3

169.5

Y/E Mar Per share data (Rs)

BV Profitability ratios (%) Gross margins

58.9

59.8

60.2

66.4

66.7

Operating margins

1.3

26.6

3.1

31.0

31.3

Net margins

0.1

20.0

4.4

20.6

21.4

742.2

32.4

219.7

30.7

23.7

0.5

0.5

4.5

0.4

0.4

Valuation ratios (x) PE P/BV EV/EBITDA

71.3

24.0

307.0

20.2

16.0

EV/Sales

0.9

6.4

9.5

6.2

5.0

RoE

0.1

15.0

2.1

14.7

17.6

RoCE

1.7

13.1

2.6

13.8

16.1

Source: Company, BOBCAPSe p*-provisional

| Equity research |

4

Zen Technologies Ltd. | 2 June 2016

(Wholly owned subsidiary of Bank of Baroda)

Sales and Dealing Team Anil Pawar – Senior Manager – Dealing

+91-22-6138 9325

[email protected]

Sachin Sambare – Manager– Dealing

+91-22-61389331/33

[email protected]

Ashwin Patil – Executive – Dealing

+91-22-6138 9326

[email protected]

Research Team

Sectors

Vaishali Parkar Kumar – Analyst

Agri, Auto, Defence

+91-22-6138 9382

[email protected]

Padmaja Ambekar – Analyst

Auto Ancillary, Infra, Midcap

+91-22-6138 9381

[email protected]

Akanksha Tripathi – Analyst

Footwear, FMCG Textile, FMCG, Chemicals Bio Tech, Pharma

+91-22-6138 9383

[email protected]

+91-22-6138 9384

[email protected]

+91-22-6138 9351

[email protected]

Kshitij Kelkar

+91-22-61389386

[email protected]

Kiran Sawardekar

+91-22-61389385

[email protected]

Nisha Rasal

+91-22-61389385

[email protected]

+91-22-61389336

[email protected]

Rishabh Mehta – Analyst Hareesha Kakkera – Associate

Infra,

Retail Dealing Team

Debt Dealing Team Minaxi Tiwari

UTI Tower, 3rd Floor, South Wing, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051. India. Ph.: +91.22.6138.9300 || Fax: +91.22.6671.8535 || Email: [email protected]|| Web: www.bobcaps.in NSE SEBI No. (CASH): INB231304537 NSE SEBI No. (DERIVATIVES): INF231304537 BSE SEBI No. : INB011304533 SEBI Registered Research Analysts: INH000000040 valid till 03rd February, 2020

Disclaimer BUY. We expect the stock to deliver >15% absolute returns. HOLD. We expect the stock to deliver 5-15% absolute returns. SELL. We expect the stock to deliver