Zen Tech: After a 2600% surge in 5 years, Nuvama projects 70% more upside potential for this small-cap defensive stock

Zen TechnologiesA leader in defence simulation and anti-drone technology, it has been gaining significant attention in India’s defence sector, driven by government initiatives and an increasing focus on advanced technology. Over the past two years, the stock has generated an impressive 700 per cent return for its shareholders and a whopping 2,600 per cent over the past five years.

This upward momentum is likely to continue, according to local brokerage firm Nuvama Institutional Equities, as it initiated coverage of Zen Technologies with a strong “buy” rating, citing the company’s solid growth prospects and robust order book.

The brokerage has set a 12-month target price of ₹2,200, suggesting a 32 percent increase from the stock’s previous closing price, with a bullish target of ₹2,818 (70 percent increase) in the coming yearsNuvama argues that Zen Technologies’ premium valuation is justified given its high growth potential.

Nuvama highlighted that Zen Technologies is one of the few providers of mission-critical defense simulators, which enhance the readiness and capabilities of the armed forces. The company’s competitive advantage lies in its internal intellectual property, with more than 75 patents, and its cutting-edge anti-drone systems, which positions it for sustained growth.

Defense simulators: improving military readiness

The Indian Ministry of Defence introduced the “Framework for Simulators in the Armed Forces” in 2021, which aims to improve training through simulation-based methods. This framework emphasizes the cost-effectiveness, safety, and accuracy of using simulators, which offer near-realistic training experiences for warfighters.

The shift to simulation-based training is a strategic measure that addresses budget constraints while ensuring high-quality training for soldiers, thereby preserving equipment in the field and reducing expenses.

Zen Technologies is one of the few manufacturers of Defence simulation in India with in-house technology and IP and enjoys 80-90 percent market share for its range of earth simulation products.

Anti-drone systems (ADS): India is moving full speed ahead

In addition to its leadership in defence simulation, Zen Technologies entered the anti-drone systems market in 2021, a sector that is witnessing rapid growth. According to the brokerage’s estimates, the global anti-drone systems market is projected to expand at a compound annual growth rate (CAGR) of 28%, with India, which contributes 8-10% of this market, poised for similar growth.

The Indian market is expected to grow from USD 255 million in FY24 to USD 881 million in FY29, driven by rising security concerns and technological advancements.

Zen’s counter-drone solutions, which include both hard and soft kill systems, are crucial for national security, especially for protecting sensitive areas such as borders, military installations, and strategic locations such as airports and nuclear plants. High demand for counter-drone systems with a range of up to 5 km is expected to further boost growth.

Stellar order book

Nuvama Institutional Equities has placed its confidence in Zen Technologies, citing the company’s significant order backlog and long-term growth potential. Zen is currently in a delay that is worth ₹14 billion, four times its fiscal year 2024 sales—with an oil pipeline ₹40 billion in the next two to three years.

This huge order book reflects the growing demand for its simulators and anti-drone solutions, both domestically and in export markets.

What sets Zen apart is its investment in research and development (R&D). With over 75 patents and more than 150 pending, the company demonstrates its commitment to innovation. Its foray into emerging segments, such as anti-drone systems, has expanded its total addressable market, and its focus on in-house design ensures it maintains a competitive edge.

Nuvama projects that Zen Technologies will achieve a CAGR of over 54 percent in earnings per share (EPS) between FY24 and FY27, driven by increasing simulation penetration, government-focused initiatives such as the Agniveer plan, and Zen’s expansion into new markets.

The company boasts one of the highest gross margins in the defence sector, between 65-75 per cent, and an impressive return on equity (RoE) and capital employed (RoCE) of over 22 per cent. This, combined with its focus on in-house R&D and burgeoning defence market, makes Zen Technologies a significant player in India’s defence ecosystem.

“ZTL is an IP-focused defense company due to its advanced in-house design and development capabilities, which justify its valuation premium in our view,” Nuvama said.

Disclaimer: The opinions and recommendations expressed in this article are those of individual analysts and do not represent the views of Mint. We recommend that investors consult with certified experts before making any investment decisions.