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CRISIL retains valuation grade of 5/5 to Zylog Systems

Published on Tue, Nov 29, 2011 at 17:10 | Source : Moneycontrol.com

Updated at Tue, Nov 29, 2011 at 17:13

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Zylog Systems

BSE | NSE 30/05/12

Are Mutual Funds betting on Zylog Systems?

CRISIL Research has come out with its report on Zylog Systems . The research firm has maintained the fundamental grade of 3/5 to the company in its November 28, 2011 report.

Zylog Systems Ltd's (Zylog's) Q2FY12 revenues in US dollar and rupee terms were significantly below CRISIL Research's expectations due to reduction in employee base, decline in billing rates and utilisation levels. The operating profitability and PAT were better than expected. The company's EBITDA margin was higher than expected due to lower-than-expected software development cost, and general and administration expenses. Also, the company reported other income of Rs 145.4 mn in the quarter, which was significantly higher than expected. The company paid tax at the rate of 35% vs. our full-year estimate of 28%. We will revisit our estimates post interaction with the management. We maintain our fundamental grade of 3/5.

Q2FY12 consolidated result analysis
� Zylog's Q2FY12 revenues declined by 4.6% q-o-q (increased by 7% y-o-y) in US$ terms to US$ 108 mn (declined by 2.6% q-o-q in rupee terms to Rs 5 bn) due to 3.4% decline in services revenue and 6.6% decline in products revenue q-o-q. The employee base declined to 4,528 from 4,771 in Q1FY12. Also, there was a decline in onsite and offshore billing rates and utilisation levels for IT services.

� EBITDA declined by ~4% q-o-q (increased by ~56% y-o-y) to Rs 843 mn mainly due to decline in revenue. Software development and employee cost, which accounts for ~68% of revenue, remained flat q-o-q (down by 5% y-o-y). General and administration expenses declined by 21% q-o-q (up 53% y-o-y), while selling and marketing expenses increased by 17% q-o-q (1% y-o-y).EBITDA margin declined by 22 bps q-o-q (improved by 545 bps y-o-y) to 16.8%.

� Interest cost declined by ~16% q-o-q (up 51% y-o-y). Other income was Rs 145 mn compared to Rs 95 mn in Q1FY12 and Rs 167 mn in Q2FY11. As a result, adjusted PAT increased by 28% q-o-q (~28% y-o-y) to Rs 491 mn. PAT margin improved by 235 bps q-o-q (175 bps y-o-y) to 9.8%.

� Adjusted EPS was Rs 29.8 compared to Rs 23.3 in Q1FY12 and Rs 23.2 in Q2FY11.

Valuation: Current market price has strong upside
We continue to use the discounted cash flow method to value Zylog.We maintain our fair value estimate at Rs 656 per share. At the current market price of Rs 436, the valuation grade is 5/5.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.