Business: Zen is 16 yr old company, primarily into simulation space for Police, Army, Navy so its sort of defense sector play. They like to call themselves as a ‘System Engineering’ company having skills in mechanical, software and electronics.
It’s important not to confuse them with other companies who work on off shoring model, Zen invests heavily in R&D and skills so that they can be at the cutting edge of innovation They are setting up a subsidiary for making games for platforms like PS/3 etc, will be launching their first game by end of 2010. .
Moat: Low cost producer and familiarly with Indian procurement cycle and customer behavior. Any foreign company investing in defense sector needs have an offset cost. Not a great moat but building a brand takes time.
Competition: BEL (Bharat electronics) is partially into similar space however Zen is in niche sector.
Financials: The results reflect that the company has graduated to a higher sales and growth path last couple of years (prior years the sales growth was flat) they seem to have gained a critical mass to at least remain at this level. FY10 sales is about 52 crore, profits 16 crore, the results are flat to marginally lower as compared to last year. Debt is minimal and margins are high.
Risks: Threat from competition and due to over dependence on govt. orders earnings will be lumpy (fourth quarter bias)
So should you buy ?
This is a kind of stock you want to track and buy as the business improves, its hard to ‘load the truck’ considering lumpy results and evolving nature of the business. At Rs 190 and mcap of 180 crores is value for money as a small exposure.
2 comments:
What do you think the company is worth on the high and low end?
@Mariusz- It's trading currently at low valuation point (about 10 times cash flow). Negatives are in the price, positives are not. If the things go well the stock has a potential to be a multi-bagger. I have built-up a small position and decided to add if things go well.
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