Ishaan’s Longterm Portfolio

ZEN TECH

This a new addition to my portfolio. I was fortunate enough to find this stock when it was consolidating for the last 8 months. Now it has given an impressive 30% rally in just 2 weeks, owing to all the Defense contracts news in the market. Valuations are pretty high for this stock. Current PE is at about 80x EPS. This valuation for me is very high but I realized that I am never going to find this stock at cheaper valuations in the future. If I need a big piece of the upcoming rally, I will have to take the bitter pill and have patience with this stock.

BUSINESS SEGEMNTS
This company is mainly into 2 different businesses.

1. Annual Maintenance Charges – 21%
   This included maintaining the equipment and annual contracts for any repairs, etc. This is a high margin and recurring business for the firm. Though over the past few years, the share of this segment is going down, but I look to it as a positive thing. It means, sale of equipment is higher and we can see this segment grow in value in coming years. This segment is a no brainer and not so exciting as the Equipment Business.

2. Counter- Drone Systems
   This is the segment that got me excited. It is very clear that future wars will be fought with drones. We can already see the mass deployment of drones in Russia-Ukraine and Iran-Israel Wars. Pakistan and China have also deployed Drones along their Borders with India and hence Anti- Drone Systems will have to be deployed by us on a very large scale. Zentech Counter- Drone Systems can neutralize a UAV in a radius of 4kms. The exact order book or the breakup of exports and imports is a bit difficult to find. This segment is ofc a low margin segment with High RnD costs but revenue visibility and Growth Potential is very high.

3. Tank Simulators
   Zentech has >90% Market Share in Tank Simulation. This is also a stable and recurring sort of revenue for the firm.

BUSINESS OUTLOOK

The company currently has a 1400CR order book and expect to book 900CR in FY-25.
Geographically, share of Exports and Imports is 50-50. This means, lower income countries can be a market where Zentech can grow their verticals. FY-24 PAT margins are at 25-27% of Sales.
Zentech is a Debt Free company which gives me a bit more relief about the sustainability of the Financials. ROCE is impressive at 46%.

VALUATIONS

In FY-24, the PAT margin was close to 27% of Sales. Considering the same metric, I am estimating 225-240cr PAT for FY-25. At forward PE of 50x FY-25 EPS, the price comes to 1340 per share. The stock is currently trading at 1200 levels.

This does not mean that the stock is undervalued or Overvalued. Market dynamics will affect this stock but any major correction or time correction is a good opportunity to Invest.

Inherent Risks are decrease in Government Spending on Defense Equipment or favouring foreign firms for defense equipment instead of Localization. Another risk is Execution Risk. If the management falls short of delivering the 900cr mark while maintaining margins, we can see a PE rerating on the lower side. Again, this is will be an amazing opportunity to dollar cost average or make a fresh position.

Would appreciate any recommendations and discussions over this. Only condition is, lets make it constructive.