Omnitech, Zylog Systems

 Omnitech, Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems

Zylog Systems - BUY

Zylog Systems - BUY

Listing - Zylog Systems

Zylog will list on August 17 2007

Zylog Systems Limited Allotment Subscription Details

Qualified Institutional Buyers (QIBs) - 89.5541 times

Non Institutional Investors - 143.9542 times

Retail Individual Investors (RIIs) - 35.1330 times


OVERALL - 76.51 times

Zylog Systems — IPO: Invest at cut-off

Investors with a one/two-year perspective can subscribe to the initial public offer from Zylog Systems, considering its business prospects and reasonable asking price. Zylog is a Tier-2 software services and solutions provider to a predominantly US clientele. The company provides services such as application development and maintenance, enterprise infrastructure management and quality assurance and testing. It also has product platforms for seamless integration of various software applications for telecom, manufacturing and banking clientele.
Additionally, Zylog derives significant revenues from partnering with system integrators/solution providers, independent software vendors (ISV) and value-added resellers (VAR).Business Outlook
The company, which began operations in 1996, is different from the typical IT outfit, in that it generates 81.5 per cent of its revenues from services rendered onsite. While BFSI (Banking Financial Services and Insurance) and telecom are its key operational verticals (together contributing 56 per cent of revenues), Zylog generates significant revenues from retail, manufacturing and healthcare verticals.
Zylog’s revenues have grown at a compounded annual growth rate of about 58 per cent the past four years, driven by certain key operational metrics and strategic moves.
Zylog’s business is driven by the software solutions that it offers and a ‘collaborative sales model’. The latter means that it acts as a channel partner for some big international players such as Sun, Microsoft, and HP.
Besides helping the company tap the business of these players, this model aids it to acquire clients independently through aggressive marketing.
Zylog derives its revenues from servicing specific business units of large corporations rather than by providing enterprise-wide solution(s) that larger players offer.
Apart from making the business less volume driven, this strategy enables greater focus, allowing Zylog to provide tailored IT, consulting services and product platforms to its clients. The association with the bigger players has also, over the years, given it greater scope for value-addition to the international players’ portfolio as well as its own.
Second, the company derives 46 per cent of its revenues from fixed price billing, which is milestone-based. This indicates that the company may have robust means of estimating timelines and expertise required towards completion of projects. This could help in smoother revenue realisations.
Third, the top 10 clients contribute 25.6 per cent of its revenues, indicating that client concentration risks are not high. MCI, its top client, a telecom company in the US, contributes about 4 per cent of its revenues. A healthy trend in client additions (the company has 16 million dollar clients) and a repeat business percentage of 88.9, are positive indicators. Expansion Plans
Zylog plans to raise about Rs 126 crore at the upper end of the IPO price band from this IPO. Apart from this, it has raised Rs 43.8 crore through preferential allotment and Rs13.15 crore from a bank term loan. The company plans to spend about Rs 66.7 crore (Rs.7.6 crore has already been spent) to set up two offshore development centres (ODC) in Chennai, to increase its offshore presence. This could help the company improve its margin profile (by lowering costs) and acquire a more desirable offshore-onsite mix.
A sum of Rs 81.8 crore has been earmarked for working-capital requirements and an unspecified amount towards possible acquisitions. This is expected to be an overseas acquisition, which could help tap new locations (other than the US) to cross-sell expertise and, possibly, offshore part of the work.Risks
The company now derives 98 per cent of its revenues from the US. This, together with the fact that the company has not entered into any forward contract towards hedging its dollar exposure, renders the company vulnerable to rupee appreciation risks. Zylog’s acquisition plans need to be watched for overall strategic fit to its offshore/onsite operations and the possible margin pressures that such an acquisition could add.
As a relatively small player, the company also faces considerable competition from Tier-1 companies and established Tier-2 players, which may have deeper pockets. This could exert pricing pressures. Other execution and financial risks such as attrition and wage inflation are applicable to Zylog as well.Valuation
At the upper end of the price band, the offer values the company at about 11 times the current earnings, on the post-offer equity base. This is at a discount to other Tier-2 IT services companies such as i-Gate, Hexaware and Mastek. The EBITDA (earnings before interest depreciation and amortisation) margin at 17.1 per cent compares reasonably well with that of i-Gate and Mastek. Offer Details
Zylog is offering 36 lakh shares, representing a 21.89 per cent stake, in the price band of Rs 330-350. The offer is open from July 20-25. Motilal Oswal Investment Advisors is the book running lead manager to the issue

Zylog Systems IPO Analysis (CM)

Zylog Systems, promoted by first generation entrepreneurs Sudarshan Venkatraman and Ramanujam Sesharathnam, is a global services provider delivering technology-driven business solutions. The major focus is application development and integration including web application, web services, application integration, business Intelligence, data warehousing and mobile and wireless applications; enterprise infrastructure management and quality assurance & testing. The company also has a few products -- Z*Connect and Z*Prism -- in the telecom space, insured vehicle accident recovery system and claims management systems in the insurance space; RTGS PayManager, VISTEM and WAP Page in the banking, financial services and insurance (BFSI) space.

Over the last four years, Zylog Systems has made five acquisitions. The company operates through two global development centres in Chennai. It has overseas branches set up across the US. The US headquarter is located in New Jersey. Subsidiaries have also been set up in Singapore and United Kingdom. But 98% of the revenue is derived from clients located in the US. About 81.50% revenue comes from services performed onsite, up from 80.73% in the year ending March 2006 (FY 2006).

End March 2007, ZSL had 133 consultants and 835 permanent employees with 635 technical staff and 127 support staff. The attrition rate of the software professionals was 21.9% per annum in FY 2007.

The number of clients increased to 259 clients in FY 2007, from 196 in FY 2006. The million-dollar clients increased to 16 in FY 2007, from six in FY 2006. Repeat business constituted 88.9% of revenue in FY 2007, up from 70.7% in FY 2006. Top client contributed 3.84% (2.60% in FY 2006) of revenue, top 5 clients 15.44% (10.79%), top 10 clients 25.67% (18.27%) and million-dollar clients 34.31% (12.56%).

In industry verticals, BFSI contributed 34.12% in FY 2007 (39.94% in FY 2006), telecom 20.96% (20.96%), retail 8.20% (5.27%), manufacturing 7.32% (12.20%), pharma/healthcare 7.83% (5.33%) and others 20.53% (16.30%).

In service verticals, consulting contributed 22.65% in FY 2007 (36% in FY 2006), development 44.95% (34.60%), maintenance 6.57% (7.70%), package implementation 13.43% (8.80%), testing 3.60% (5.20%), application support 3.78% (4.70%), network support 1% (1.10%) and others 4.02% (1.90%).

The net proceeds of the issue along with preferential allotment of Rs 43.88 crore and term loan of Rs 13.15 crore will be utilised for setting up Offshore Development Centres (ODCs) in Chennai, acquisitions/strategic investments and meeting working capital needs.

Strengths

• Over the last four years, operating revenue grew at a CAGR of 58.5% and net profit at a CAGR of 76.7%. This is a consistently good performance.

• Operating profit margin (OPM) is at 17-18% level, in line with its onsite focus. Going forward, offshoring will increase leading to improvement in margin due to the setting up of ODCs.

• Acquisitions will expand clients and geographic presence, enabling cross-selling of services and solutions.

• Unlike other medium-sized IT companies, not dependent on handful of customers. In FY 2007, 95% of the revenue was from Top 145 clients, with Top 10 clients contributing 25.70%. Also, repeat business accounted for 88.90%, up from 70.7% in FY 2006.

Weaknesses

• Onsite-focused companies are more prone to visa-related issues and anti-outsourcing rhetoric.

• OPM has been continuously falling every year, from 29.9% in FY 2003 to 17.1% in FY 2007.

Valuation

At the price band of Rs 330- Rs 350, FY 2007 EPS (on post-issue equity) of Rs 33.2 is discounted 9.9-10.5 times. Onsite centric companies trade at low P/Es compared to offshore-focused companies. Prithvi Information Systems, which had 90.1% revenue from onsite in FY 2007, trades at TTM P/E of 6.3.