Rating Rationale
October 27, 2023 | Mumbai
Zen Technologies Limited
Ratings upgraded to 'CRISIL A-/Stable/CRISIL A1'
 
Rating Action
Total Bank Loan Facilities RatedRs.151 Crore
Long Term RatingCRISIL A-/Stable (Upgraded from 'CRISIL BBB/Positive')
Short Term RatingCRISIL A1 (Upgraded from 'CRISIL A3+')
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Zen Technologies Limited (ZTL; a part of Zen group) to CRISIL A-/Stable/CRISIL A1from ‘CRISIL BBB/Positive/CRISIL A3+’.

 

The upgrade reflects the strong business performance in fiscal 2023 and the first quarter of the ongoing fiscal with reported revenue of Rs. 219 crore and Rs 132 crore, respectively, along with significant improvement in the orderbook position, which provides revenue visibility in the medium term. In line with the enhancement in scale, operating margin also improved to above 30% and is likely to sustain at 30-35% in the medium term. With outstanding orders of Rs 1275 crore (as on September 5, 2023), the company is expected to improve the business performance in the ongoing fiscal as well.

 

The ratings continue to factor in the established market position of the company in the design, development, and supply of training simulators for the defence segment and the strong financial risk profile. These strengths are partially offset by exposure to the tender-based nature and working capital intensive operations.

Analytical approach: Consolidated

CRISIL Ratings has combined the business and financial risk profiles of ZTL, Zen Technologies USA and Unistring Tech Solutions Pvt Ltd. This is because they are managed by the same promoter group and have strong business and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established market position of the company in the design, development and supply of training simulators for the defence segment: The group is the largest supplier of simulation training equipment and anti-drone systems in India. The market position is further strengthened by the continuous research and development (R&D) the company undertakes to bring out new products. The company benefitted significantly after the roll out of the Defence Production and Export Promotion Policy (DPEPP) and the framework rolled out by the Ministry of Defence in September 2021 regarding increased utilisation of simulators for the training of armed forces. This coupled with the incremental demand for anti-drone systems has increased the orderbook position to an all-time high of more than Rs 1250 crore. The company will also continue to benefit from the extensive experience of its promoters.

 

Improving business risk profile: Revenue has picked up significantly to Rs 219 crore in fiscal 2023 backed by better order execution and strong orderbook position. The company has already achieved around Rs 131 crore in the first quarter of the ongoing fiscal and business growth momentum is expected to continue in the medium term. Orderbook has also been witnessing significant growth and currently stands around Rs.1450 crore as indicated by the management. Operating margin improved to above 30% and is likely to remain at 30-35% over the medium term.

 

Strong financial risk profile: The capital structure has been above average due to lower reliance on external funds, yielding a gearing of less than 0.1 time for the four fiscals ended March 2023. The company aims to remain debt free in the medium term. Hence, capital structure and debt protection metrics will continue strong. The company currently has free cash balance of more than Rs 200 crore, which will be utilised for meeting the incremental working capital requirements for the growing scale of operations.

 

Weaknesses:

Exposure to risks related to tender based operations:  The company's revenue profile is exposed to risks related to tender based nature of operations and the successful and timely execution of the same. As a result, the turnover has been volatile at Rs 219 crore to Rs 70 crore over the three fiscals ended March 2023. This is mitigated by the recent favourable government regulations and the well-established market presence of the company. However, any adverse government regulations to the segments catered to by the company will continue as monitorable.

 

Working capital intensive operations: Gross current assets were sizeable at 467-545 days over the three fiscals ended March 31, 2023, driven by high debtor and inventory levels. However, debtors and inventory days are expected to improve over the medium term backed by faster debtor realisation terms as per the defence procurement policy and management is also working towards improving the working capital cycle.

Liquidity: Strong

Liquidity is strong; marked by nil utilisation of the fund-based working capital limits in the 12 months ended July 2023 and strong cash accrual of more than Rs 100 crore expected, against which there are no repayment obligations. The company had free cash balance of Rs 110 crore as on March 31, 2023. The management has indicated that they will maintain sizeable cash balances over the medium term and sudden outflow resulting in the weakening of liquidity profile is not expected to occur.

Outlook: Stable

CRISIL Ratings believes the group will continue to benefit from its established track record and strong orderbook position

Rating Sensitivity Factors

Upward Factors

  • Improvement in revenue while maintaining operating margin of above 28-30% and strong orderbook position.
  • Efficiency in working capital cycle while sustaining financial risk profile and liquidity position

 

Downward Factors

  • Decline in operating margin to less than 15% leading to significant moderation in net cash accrual.
  • Any large debt funded capital expenditure and/or any further stretch in working capital cycle, adversely impacting the financial risk profile.

About the Company

Incorporated 1993, ZTL develops, designs and supplies PC based training simulators and ant-drone systems for the Ministry of Defence, police and para-military forces, government departments, and private players. ZTL has ISO 9001:2008 (QMS), ISO 27001:2005 (ISMS) certifications and is a CMMI Level 3 company. ZTL's R&D unit is recognised by the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India.

Key financial indicators -  Consolidated

As on / for the period ended March 31

Unit

2023

2022

Operating income

Rs crore

219.44

70.33

Reported profit after tax (PAT)

Rs crore

49.97

2.61

PAT margin

%

22.77

3.71

Adjusted debt/Adjusted networth

Times

0.02

0.05

Interest coverage

Times

19.59

6.50

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Issue size (Rs.Crore)

Complexity

levels

Rating assigned with outlook

NA

Fund-based facilities

NA

NA

NA

15

NA

CRISIL A-/Stable

NA

Fund-based facilities

NA

NA

NA

5

NA

CRISIL A-/Stable

NA

Non-fund based limit

NA

NA

NA

83

NA

CRISIL A1

NA

Non-fund based limit

NA

NA

NA

30

NA

CRISIL A1

NA

Non-fund based limit

NA

NA

NA

18

NA

CRISIL A1

Annexure - List of Entities Consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

Zen Technologies Ltd

100%

Parent

Unistring Tech Solutions Pvt Ltd

51%

Subsidiary

Zen Technologies USA

100%

Subsidiary

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 20.0 CRISIL A-/Stable   -- 23-11-22 CRISIL BBB/Positive 22-12-21 CRISIL BBB/Stable   -- Withdrawn
      --   -- 04-10-22 CRISIL BBB/Positive   --   -- --
Non-Fund Based Facilities ST 131.0 CRISIL A1   -- 23-11-22 CRISIL A3+   --   -- Withdrawn
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Fund-Based Facilities 15 HDFC Bank Limited CRISIL A-/Stable
Fund-Based Facilities 5 Indian Bank CRISIL A-/Stable
Non-Fund Based Limit 83 HDFC Bank Limited CRISIL A1
Non-Fund Based Limit 30 Indian Bank CRISIL A1
Non-Fund Based Limit 18 Exim Bank CRISIL A1
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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