The strong rupee may have dampened the scenario to a certain extent for the IT majors in India, but their smaller counterparts are not giving up yet. Instead, they are working harder on their expansion plans. Zylog Systems (ZSL) is no exception to this.
Business
ZSL, which is an ISO 9001-2000 company and is 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 FY2006-2007.
For FY2006-2007, BFSI and telecom were the important verticals contributing 34% and 22% respectively. The company enjoys a wide base of clients. There are 259 active clients and the top client accounts for 3.8% for FY 2006-2007.
The top 5 and top 10 clients brought in 15.4% and 25.7% of the total revenue for fiscal year 2006-07. There are 16 million-dollar clients and they accounted for 34% of the company revenues for FY2006-07.
ZSL has 133 consultants and 835 employees and for the year ended March 2007 and it enjoyed an attrition rate of 21.9%. The company earns almost 100% of its revenues from exports.
US-based clients accounted for 98% revenues in FY2006-07. The onsite revenues contribute more than 80% to the total revenues of the company.
Financials
ZSL has shown a CAGR of 57% in its revenues as its revenues grew from Rs 64.8 crore in FY 2002-03 to Rs 408 crore FY 2006-07. The net profit, on the other hand, grew from Rs 9.26 crore to Rs 54.6 crore depicting a CAGR of 56%. However, the operating margins are seen under pressure over a period of last 5 years as it depleted from 30% in FY 2002-03 to 17% in FY 2006-07. The software development expenses are the chief cost head amounting to more than 60% of the revenues.
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 an additional 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
ZSL has successfully completed its private placements. 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 is a scope for listing gains.
However, there are some factors investors must keep in mind while investing. Going forward, ZSL’s ability to complete the expansion plans on time will decide the future of the company.
Also, the ability to manage its operating margins, diversifying across the globe and bypassing the strong rupee in the short term will decide the growth of the company in the times to come.
