Defence stock lost 53% in 2025, Elara says 'Buy' for 30% upside

Elara Securities has initiated coverage on a defence stock that has lost 53 per cent of its market value in the first three months of 2025 alone. The retail favourite, where 2.29 lakh individuals with up to Rs 2 lakh worth shares, owned 26.78 per cent stake at the end of December quarter, is trading at 21 times one-year forward EPS. Elara said this is significantly lower than that for other private players. This makes the prevailing price a good entry point, it said.

This stock is ZEN Technologies Ltd (ZEN Tech), a private player that operates in the niche categories of simulators and counter drone systems. Elara has suggested a 'Buy' rating with at a target price of Rs 1,535, based on 25 times March FY27 EPS. Elara said the prevailing PE is at 10 per cent discount to private defence industry PE of 27 times.

On Wednesday, the stock was down 1.34 per cent at Rs 1,175.30. Elara's target price suggests a 30 per cent-plus upside over this price.

"We expect an earnings CAGR of 60 per cent through FY24-27E with an average ROE and ROCE of 42 per cent each through FY25E-27E. Key risks to our call are delay in awarding of tenders and shift in defence budget allocation away from simulators," Elara said.

ZEN Technologies has a market share of 90 per cent in the land-based simulators. It is now foraying into naval simulators through new acquisitions.

"ZEN Tech is set to leverage: 1) in-house R&D and IP-led asset light business model with high ROE, 2) large addressable market for core categories (simulators and anti-drones) and new segments (AI-led defence solutions), and 3) value unlocking through new acquisitions," Elara said.

Elara said ZEN enjoys high margin in the simulators category due to its own IP that contributes 25-40 per cent to Bill of Materials and 80 per cent outsourcing model. In the CDS, it said demand strong due to rising geopolitical flashpoints.

"During the Israel-Iran conflict, 150 drones were fired. This parenthetical, along with various other geopolitical flashpoints, indicates heightened demand for counter drone systems (CDSs). So, expect the domestic CDS market to post a CAGR of 24 per cent to Rs 15,000 crore in FY29. ZEN, with products such as Vyom Kavach, enjoys an edge in the CDS market," Elara said.

It also seeks to increase its export presence as its products are 20-25% cheaper than those of global OEMs, the brokerage added.

"ZEN has thus forayed into drones with 100 per cent indigenization and on the wings of new acquisitions. It is diversifying into new areas of electronic warfare (EW) and AI-led defence solutions (market size: Rs 8,000 crore). ZEN seeks to grow its exports via a new tie-up in the US and through setting up a subsidiary there with a view to establish a dedicated supply chain to manufacture in that country," Elara said.