INDIAN CAPITAL FUND RESEARCHZEN TECHNOLOGIES LTD. ZEN TECHNOLOGIES LTD.

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Analyst NameAnand Upadhyay

Zen Technologies has been doing simulation for training purposes since its incep-tion in 1993. The simulators developed by Zen have been mostly for Indian Security Forces. Zen has also tied up with Bharat Earth Movers Limited (BEML) for developing Heavy Equipment Mining Simulators. ZEN has been at the forefront of applying new technologies and developing new products and is actively involved in indigenization of technologies, which are helpful for Indian security forces. Zen is the only company in India producing simulators for defense services and commercializes PC-based vi-sual simulation technology for small arms training simulators. In 2009, Zen decided to club its expertise in 3D application development, robotics and electronics and foray into gaming.

Industry Structure and Development

Simulator is defined as a system-specific device that helps personnel train in sys-tem use and maintenance. Simulators are used in various fields and their use is not restricted to training security forces alone. A few areas where simulators are being used extensively include weapons training, aviation, maintenance, medicine, power plant, bridges, ships and entertainment. This list is not exhaustive and as technology becomes more affordable, more and better applications will be available.

Multiple triggers for the stock to be re-rate:

1) Premium rating from gaming Subsidiary Version 2 Games expected:

On 21st August, 2010, Zen Technologies Ltd has incorporated a wholly owned subsid-iary Company with the name Version 2 Games Ltd.

Zen Technologies forayed into game development last year and is currently working full swing on its debut PS3 title ‘SnS: Reprisal’, which is ready for the Global Launch in February, 2011. Consoles are the major force in the gaming today with much larger market share. The major focus of the company is on PS3, XBOX 360, Wii and PSP consoles.

As per the estimates, Zen along with Sony plans to sell 3,00,000 copies globally in next one year at the price of 60 dollar per game.The sharing ratio in the beginning is in favour of the Publisher i.e. Sony. (60% share in Q1, 50% in Q2, 40 % in Q3 and 30% in Q4 ) In FY 2011-12.

The company plans to add around Rs 21 crore to its top line from gaming business.The Company is also developing another character based for Play station and X box. Zen also plans to capitalize its simulation background and working hard on simulation based game for new type of product in the Gaming industry.The company also plans to release a social networking game like farmville and Mafia wars for Facebook and Yahoo in Q2. Version 2 Games grabs three Hollywood IPs recently. Along with SnS, Version 2 games starts working on its second title and hopes to complete the same in Q2. 2) Simulation business: Zen Technologies is the India’s largest training simulator company. ZEN weapon simu-lators cater to armed forces, state police forces, paramilitary and special forces. Simi-larly the driving simulators cater to all the defense forces mentioned before along with the State Road Transport Authorities and Driving Training Schools. The heavy earth equipment simulators cater to the mining companies. The business is totally relation-ship driven. Promoters have 27 years experience of dealing with defence establish-ments. The company plans to participate in new tenders worth Rs 700 cr to be floated by defense in next 3 years. The company focus on those segment of defense orders where large international players do not participate due to their high operational ex-penses & small order. The current order book size is about Rs 75 Crore and company hopes to get Rs 45 crore order in H1 from simulation business. 3) Entry barriers : Companies that have commendable products may find the lack of understanding of

BUY Price Rs 150 Target Price Rs 210Implied Upside : 40% (One Year)

Current Price Rs 150Market Cap. Rs 133 CroreFree Float : Rs 66 Crore

(%) 1M 1W 15% 7%

Research Analyst+91-9582111452info@icfr.us

INDIAN CAPITAL FUND RESEARCHZEN TECHNOLOGIES LTD.

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ZEN TECHNOLOGIES LTD.the process to be a serious barrier. Small and medium companies, especially foreign ones, will find it extremely difficult to weather almost three years of procurement process. The cost to compete is significantly high. With many bidders in the race the uncertainty ofwinning the bid looms large to the potential bidders and, sometimes the risk / reward ratio seems unattractive. Another complication for the foreign vendor is the Indian Defence’s offset requirement for global purchases over Rs 300 Crores. 4) Government focus on the gaming Industry : Gaming has shown a 22 per cent growth in 2009, and is expected to grow at a CAGR of 32 per cent in the next five years to reach Rs 32 billion by 2014. As per market reports, a consultant is finalizing a detailed report for setting up a National Centre for Animation, Gaming and Visual Effects, a high-level task force is dwelling upon various issues following an assurance by Information and Broadcasting Ministry earlier this year to give priority to this sector.A 13-member task force headed by I&B Additional Secretary, Rajiv Takru, has been set up recently will evolve a methodology to ensure the widest possible consultations on a 14-point charter in the terms of reference and submit its report within six months from the date of its first meeting, which was held earlier this month. Task Force will examine the possibility of entertainment tax exemption for children and animation feature films for 10 years, service tax exemption to studios developing original contents, rationalized customs tariff for the gaming industry, promotion of indigenous digital content education and entertainment for masses, and setting up of mul-tiple parks for the sector on the SEZ model. As per KPMG report on Console Gaming, the growth in this sector will be backed by the increase in number of casual and active games, arrival of 3G, availability of localized content, growth in ad funded gaming platforms and greater awareness of products and services.

5) WORLD CLASS Infrastructure :

The company has completed Phase I construction of production facilities on the land allotted near Hyderabad’s new internationalairport. About 75,000 sft of the facility is ready. The construction of Phase II of the facility will be considered for any new projects.The company has spent close to Rs 4 crore in the gaming R & D.

6) New business model :

In India, talented game developers are looking for the right platform and opportunity to encash the booming industry.Zen technologies is providing them a platform where they can see their ideas being converted into a high quality game. Zen has already taken initiative to fund the companies to build the games and for which it has definitely a strong and workable business model on table.

7) In Sep 2009, Promoters had taken preferential allotment of 300,000 shares (or 3.37% ) at Rs 135 per share.

8) Strong Gaming Development team :

Zenists who are involved in the development of the game is the biggest strength of the company. Zen have a huge talent pool avail-able in the simulator development team and all are gamers by heart so there’s no dearth of ideas and implementation. Currently in the gaming team strength is close to 50 and company plans to increase the same to 77 in Q4. Recently, Planning Commission has alreadyallocated Rs 520 million under the 11th Plan period (2007-12) for the Centre, as the private sector has complained of a shortage in manpower in Gaming and Animation sector which is growing at a fast rate.

9) Partnership in pipeline :

Zen is looking at opportunities to collaborate with companies that are looking for competent and experienced partner to help them do business with the Indian Defence due to some entry barriers. Zen being a prime contractor to the Indian Army is well positioned to consider joint ventures with Foreign Defence companies.

ZEN TECHNOLOGIES LTD.INDIAN CAPITAL FUND RESEARCH

ZEN TECHNOLOGIES LTD. ZEN TECHNOLOGIES LTD.

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RISK FACTORS :

• Simulation business is fully dependant on orders from defense which is politically sensitive issue hence there is always a potential of time delays.

• Tie ups with European nations for driver training at nascent stage & yet to reach threshold levels for meaningful contributions.

• Developing new games is risky as the rate of obsolescence is very high. . • In defence simulation, Zen have had competition from domestic as well as international players and the same is expected to increase marginally. • Games are extremely high-risk and high-reward business requiring continuous management attention to mitigate the risk and en-hance the chances of success.

• In defence simulation, India has very complex and stringent procurement process which includes long procurement cycle, No Cost-No Commitment basis of trials and customization of the product to suit Indian needs. The same can affect the bottom line.

•

Financials

Zen Technologies

(Rs cr) Net Sales Total Expenditure Net Profit EPS (Rs)

Fy 13E 96.67 72 24.67 28FY12E 84 66.22 17.78 20

FY11E 59.5 48 11.5 12.9

FY10 52.23 34.4 16.84 19.39

FY09 63.1 40.7 18.6 21.8

FY08 25.2 13.4 11 12.9

FY07 22.3 12.8 7.2 8.5

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