Zylog Systems

Buy for listing gains

ZSL is an ISO 9001-2000 company and being assessed for CMMI level 4, is a global services provider delivering technology-driven business solutions. The company focuses on application development, integration and enterprise infrastructure management. The consulting and development services offered by the company fetched 66% of the revenues for the FY2006-2007.

Business Highlights

Top two verticals: BFSI (34%) and Telecom (22%)
Total Clients: 259
Top client: 3.8% of FY 2007 revenue
Top 5 client: 15.4% -do-
Top 10 client: 25.7% -do-
Number of million-dollar client: 16
Employee strength: 133 consultants & 835 employees
Attrition rate: 21.9% of FY 2007
USA contribution to FY 2007 revenue: 98%
Onsite revenues: 80%

Financials at a look

Revenue CAGR: 57% for 5 years
Profit CAGR: 56% for 5 years
OPM: 30% to 17% over 5 years

Objectives

The company intends to set up two offshore development centres (ODC) with a capacity of 800 and 1250 seats at an investment of Rs 66.7 crore. For meeting the working capital requirements the company needs further Rs 81.8 crore. ZSL also intends to acquire some companies. The ODCs are expected to go on stream by November 2007, indicating low gestation period.

Outlook

The share appears to be attractively priced at 9 to 10 times its EPS of Rs 33.25 on fully diluted capital based on the earnings of FY2006-2007. There leaves room for listing gains. Risks are as follows. ZSL’s ability to complete the expansion plans on time will decide the future of the company. Ability to manage its operating margins, reducing US dependence and managing strong rupee in the short term will decide the growth of the company in the times to come.