CRISIL assigns fundamental grade of 3/5 to Zylog Systems

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CRISIL assigns fundamental grade of 3/5 to Zylog Systems

CRISIL Research has come out with its report on Zylog Systems. The research firm has maintained a fundamental grade of 3/5, valuation grade of 5/5 on the company and assigned the fair value of Rs 656 per share in its August 31, 2011 report.

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CRISIL Research has come out with its report on Zylog Systems . The research firm has maintained a fundamental grade of 3/5, valuation grade of 5/5 on the company and assigned the fair value of Rs 656 per share in its August 31, 2011 report.

"Zylog Systems Ltd's (Zylog's) Q1FY12 revenues were in line while EBITDA exceeded CRISIL Research's expectations. We were surprised by the q-o-q improvement in EBITDA margin, which was driven by flat employee cost and a decline in software development cost. PBT exceeded our expectations due to higher other income on the back of profit on sale of land. The tax rate continued to remain high at 38% (41% excluding income from sale of land and capital gain tax) due to high tax rate in the US, which depressed PAT. We have marginally raised our revenue and earnings estimate and maintain the fundamental grade of 3/5."

"Consolidated revenues grew by 2.5% q-o-q (10.8% y-o-y) to Rs 5.1 bn driven mainly by an increase in the onsite and offshore billing rates for IT services and 3.4% q-o-q (31% y-o-y) growth in the products and solutions revenue. The company's onsite utilisation rate for IT services declined by 210 bps while the offshore utilisation improved by 230 bps. EBITDA margin improved by 73 bps q-o-q (273 bps y-o-y) to 17.1% due to a decline in project cost (non-linear component of software development expenses) and flat employee cost q-o-q despite a net addition of 469 employees. However, the selling, general and administration expenses increased by ~19% q-o-q (47% y-o-y) due to an increase in the marketing efforts in Canada (Brainhunter). Interest cost declined by ~12% q-o-q (~3% y-o-y) on account of the renegotiation for the Brainhunter debt and lower short-term debt compared to other quarters. Other income increased five times to Rs 95 mn due to Rs 85.7 mn profit on sale of land. Also, tax rate (excluding the income from sale of land and capital gain tax of Rs 19 mn) stood at 41% due to higher taxes in the US. However, due to higher EBITDA, adjusted PAT increased by 12.4% q-o-q (8.6% y-o-y) to Rs 383 mn."

"We continue to use the discounted cash flow method to value Zylog. We maintain the fair value of Rs 656 per share and retain the valuation grade of 5/5," says CRISIL Research report.

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To read the full report click on the attachment