Ashish Kacholia Steps Into Rakesh Jhunjhunwala’s Shoes By Buying Defense Software Stock

Rakesh Jhunjhunwala, the Badshah of Dalal Street, held a massive truckload of 9 lakh shares of Zen Technologies, comprising 10.14% of its equity. He sold his entire holding in June 2013.

Ashish Kacholia has stepped into the void left by Rakesh Jhunjhunwala by buying 13,50,000 shares of Zen Technologies in the Oct-Dec 2014 Quarter.

Zen Technologies is a micro-cap with a market capitalisation of only Rs. 427 crore. It is engaged exclusively in manufacturing weapon and defense simulators. These simulators are used by the armed forces, para military, police forces etc.

Zen Technologies’ USP is that because it has been dealing with the Defense & Police forces for nearly 21 years, it is familiar with the complicated procurement process followed by the Forces. Foreign companies seeking to bid for Indian defense contracts can take advantage of Zen’s expertise with the procurement process so as to reduce the cost of production, customize the product for Indian requirements, ensure compliance with technical requirements and increase the chance of winning the bid.

The other opportunity for Zen comes from the requirement of the Government that foreign contractors must sub-contract a part of their contract (above Rs. 300 crore) to Indian companies. Zen has the expertise and technology to fulfill a part of that requirement of indigenous production.

However, there are also several drawbacks to dealing in such a specialized line of activity.

The first is there is huge expenditure on R&D which may or may not be productive. What compounds this is the fact that the Defense Forces insist on a fully functional trial without a purchase commitment. This means that large sums have to be invested in giving the trial without any orders being awarded.

The second drawback is that one is competing with deep-pocketed foreign suppliers who can sell the same or even a superior product at lower costs. Given the Government’s penchant for awarding contracts to the lowest bidder, this can wipe out small players without the financial muscle to hold on.

Yet another drawback is that the award and execution of Defense projects, and receiving fees for it, can be spread over several years. This means that the revenues are lumpy.

One can see an example of this from FY 2011-12 where the total income and PAT was Rs. 102 crore and Rs. 31.62 crore respectively. However, in FY 2012-13, the corresponding figures plunged to Rs. 37.11 crore and Rs. 4.70 crore respectively. In FY 2013-14, the PAT plunged further to a paltry Rs. 9 lakh.

The other big risk is that of warranty claims and performance guarantee. One really cannot argue with the Government or the Defense Forces because there is a risk of being black-listed as a contractor and being debarred from future contracts.

In fact, the volatility and unpredictably of earnings may have caused Rakesh Jhunjhunwala to sell off his holding in Zen Technologies. Whether Ashish Kacholia fares better requires to be seen.