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A 1,000% Stock Rally Fades as India Defense Revamp Sputters

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  • Zen Technologies soared on Modi goal of military modernization
  • Slower pace of government orders weighed on shares this year

A fizzling boom in the shares of India’s Zen Technologies Ltd., a designer of military simulators, shows how expectations of a rapid improvement in the nation’s armed forces are ebbing.

Prime Minister Narendra Modi outlined a plan of spending $150 billion to modernize the military and spur local defense production after taking office two years ago, stoking a surge in contractors such as Zen Technologies. The stock has fallen in 2016 as the pace of orders fell short of the expectations of the company and investors, according to managing director Ashok Atluri.

"We can’t blame the government, but our expectations weren’t realized," Atluri said in an interview. "We were communicating to shareholders that we expect the orders to come through by this time, and that didn’t happen."

Modi’s modernization drive has met with mixed success. Among the few signed orders are deals for Boeing Co. naval patrol aircraft and military helicopters, as well as for a clutch of warships to be built domestically. But a scaled-back purchase of 36 Rafale fighter jets from Dassault Aviation SA to bolster India’s ageing squadrons has stalled over price.

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Zen Technologies climbed 1,172 percent from when Modi took office in May 2014 to a record in January this year, but has since dropped about 38 percent. The stock slid as much as 1.5 percent in Mumbai on Thursday, before paring some of those losses to close down 0.9 percent, the most in a week.

An index of four defense-related companies -- including the simulator maker as well as BEML Ltd., Bharat Electronics Ltd. and Astra Microwave Products Ltd. -- is down about 14 percent in 2016, compared with the S&P BSE 500 index’s 9 percent rise.

Modi’s government has implemented a number of reforms that seek to make the defense sector more efficient, said Anurag Garg, a New Delhi-based director at Strategy&, a consulting group of PricewaterhouseCoopers LLP.

At the same time, the administration is balancing "the need to award programs fast with the need to follow the process to the letter so that the procurement decisions are fair and they hold," he said.

Parrikar’s Progress

Defense Minister Manohar Parrikar’s focus on encouraging more output from medium- to smaller-sized Indian contractors, if successful, should spur the development of the domestic defense industry, according to Deba R. Mohanty, a director at Indicia Research & Analysis in New Delhi.

Zen Technologies’ Atluri said he’s seeking 8 billion rupees ($120 million) of domestic revenue in the next three years and double that from exports. A 300-million-rupee order for the Egyptian army for a live-firing simulator is awaiting Indian government clearance, he said.

The company, based in Hyderabad in the southern Indian state of Telangana, has an order book of 1 billion rupees and is in talks with at least four other countries for exports, according to Atluri. Zen Technologies reported a loss for the past four quarters, according to data compiled by Bloomberg.

A new Indian defense procurement policy implemented in April that seeks to encourage local design and production should help speed up purchases, Atluri said.

"There has been a little delay," he said. "We’re confident the orders will come."