Apply for Zylog Systems, to jump 40% on listing: Networth

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Zylog Systems is a global IT solutions and services provider delivering technology- driven business solutions. The issue is open for subscription with a public issue of 3,600,000 equity shares of Rs 10 each through 100% book building process.

The issue closes on July 25, 2007 and the price band has been fixed at Rs 330 to Rs 350 per equity share of Rs 10 each.

Networth Stock Broking report on Zylog Systems IPO

Company Profiles

Zylog Systems is a mid sized IT solution and services company with a strong domain expertise in BFSI (34% of total revenues), Telecom (22%), Retail (8.2%), Manufacturing (7.3%), Pharma Healthcare (7.8%) & Others (7.8%). The company offers a broad range of services including Application Development, Enterprise Infrastructure Management and Quality Assurance & Testing. It also has a products development division which they sell as add on to their services. The Application development is specific to Web Applications, Application Integartion, Data Warehousing, Business Intelligence, Mobile and Wireless application and Web services.

Investment Rationale

Strong historical growth

The Company's topline has been growing at 58%CAGR and its bottomline is growing at 55% CAGR from FY03 to FY07. In FY07, over 55% of the revenues came from Fortune 1000 and Large Corp (> $ 1Bn).

Strong and diversified Clientele

The company has a distinguished set of clientele including MCI, Barclays, Pfizer, etc. The dependence on the top client is a mere 3%, this diluting the concern of dependence on one client.

Management Bandwidth

The management has an experience of more than 20 years in this industry.

Employee Profile

As on March 31,2007, the company has 133 consultants and 835 permanent employees. 655 of them work on the technical side and 127 are support staff. The stringent norm of a minimum of 3+ years of experience to be qualified to go onsite makes their onsite workforce an experienced one. The current profile of offshore is also 2.5+ years of experience.

Natural Hedging

Due to high onsite presence the company is affected to a very limited extend by the appreciation of Rupee. Moreover it has taken a substantial foreign loan that mitigates the concern of rising Rupee.

Concerns

Heavy Onsite Presence

Of the total employee strength, 537 of them are based onsite. This constitutes almost 60% of the workforce. The company intends to open 2 ODCs in Chennai to shift the workforce in India. Unless this changes towards offshore, the margins may not improve.

Severe Competition

The competition looks very severe in the face of no particular expertise in any domain by the company. The company claims that the sales team has a strike rate of culminating 60-70% of the total deals they bid for. They must continue this effort in order to grow at the same pace.

Valuation

The IPO is priced between a band of Rs.330-350. At the upper band, the company is priced at 10.5x its FY07 diluted EPS of Rs.33.36 and at 7.25x its FY08E EPS. The FY08 EPS is arrived at a conservative sales growth of 50% and net profit growth estimate of 45% against 79% net profit CAGR from FY05 to FY07. We believe the company has a potential to spike up atleast 40% from its upper band of Rs 350 on listing. We strongly recommend our investors to Subscribe to the issue.