Zenith Infotech
Performance will scale new zenith
With a well-established product in the fast growing remote IT infrastructure management, the company is set for a non-linear growth
| Buy | Zenith Infotech |
| BSE Code | 532298 |
| NSE Code | ZENITHINFO |
| Bloomberg | ZNI@IN |
| Reuter | ZINF.BO |
| 52-week High/Low | Rs 594 / 227 |
| Current Price | Rs 431 (as on 2nd January 2008) |
Zenith Infotech (ZIL) is a niche company focusing on remote IT infrastructure management, and banking software and branch automation products and services. The company has got huge success in remote IT infrastructure management, a business that is expected to drive the company’s growth, going forward. ZIL employs more than 600 people for its Indian and international operations, with sales and support offices in Fremont, Pittsburgh and Singapore. The company’s R&D and network operations center (NOC) is at Mumbai.
The company’s business can be bifurcated into two segments-Remote IT infrastructure management and Banking software and branch automation business.
Established product in the fastest growing IT industry segment: Remote IT infrastructure management
ZIL has developed SAAZ, a virtual IT management service for maintenance of desktops and servers on remote surveillance. The company invested over Rs300 mn and deployed a team of 125 software professionals to develop SAAZ over a period of four years. SAAZ is a complete IT infrastructure management product that can remotely manage and monitor desktops, servers, applications, and network devices at customer sites via the internet in a highly secure fashion. SAAZ can predict problems, deploy software and patches, and can carry out inventory of IT assets. In the domestic market, the company’s revenues are generated through a one-time license sale and annual maintenance contracts. Currently, ZIL has 140 customers in India.
After extensive testing and successful client installations in India, ZIL launched SAAZ in the U.S. in May 2004. The software was launched through managed service providers (MSPs) with a recurring revenue model; under this model, clients are charged on per user, per month basis. MSPs are software and hardware resellers that provide system maintenance support to SMEs. The MSPs use SAAZ to reduce maintenance costs and boost services revenues by delivering managed services on real time basis. Uptime and quality are the main differentiators between the MSPs with SAAZ and other MSPs.
ZIL delivers SAAZ as hosted software from the data centers in Fremont and Pittsburgh on customer’s desktops, servers, and networks. SAAZ is remotely managed by 280 people deployed at the NOC in Mumbai via the internet, a backend monitoring and maintenance setup. ZIL’s NOC service helps MSPs scale their managed service business without investing in building a large NOC and hiring a large group of technical people. In this manner, while ZIL delivers virtual NOC services seamlessly and transparently through the MSPs to the end client, the MSPs get a back-end service that is low cost, predictable, and of high quality.
Globally, IBM (Tivoli), HP (Open View), and CA (Unicentre) are three big players in the software development space; each of these companies generates revenues in excess of $1bn annually from their respective IT infrastructure management divisions. These players developed enterprise level software products for large corporations, typically with more than 2000 users. SMEs with 25-1000 users cannot afford the heavy license fees charged by the big players. ZIL fills up this vacuum as SAAZ essentially caters to the SME segment. There are more than 2,00,000 SMEs in the U.S., Canada, and Europe, with an installed base of approximately 62 mn computers; this translates into huge business opportunities for companies such as ZIL.
In April 2006, ZIL had 128 MSPs and 66,000 installations and in December 2006 it had risen to 1,15,000 installations with about 450 MSPs. In FY 2007 it is estimated to have secured 600 MSPs and 1,50,000 installations. Sensing the growth potential in this market, ZIL has strengthened its U.S sales team. The company has been incurring huge costs on marketing. For ramping up its MSP base significantly, the company has aggressive marketing plans during the next few quarters.
Alliance with Intel to add substantial value
Zenith Infotech has also entered into a 'Software License and Distribution Agreement' with Intel Corporation. Under this agreement Intel will bundle the company's software named 'SAAZ' with the PC/Desktop Mother Boards manufactured by Intel on a revenue sharing basis.
Intel will also help the company for promoting its software product 'SAAZ' and the Remote Management Services to its SMB enterprises and their distribution customers.
ZIL’s association with Intel has enhanced the credibility for SAAZ business. This association also offers ZIL an opportunity to ramp up its MSP base in Intel’s existing channel partners.
SAAZ has buoyant outlook
With many Indian companies looking to buy infrastructure management products for maintaining their ever-growing complex networks, ZIL clearly has a great opportunity to widen the installed base. Another factor that could work in ZILS’s favour is the ever growing number of Indian MSPs looking to tap global markets for providing infrastructure management services. The company knows the importance of MSPs in growing the brand and is formulating a plan to sign alliances with the major players. While the past period has seen ZIL build up an impressive list of reference customers, the management believes that the company will see huge growth going forward as more and more Indian MSPs seek global markets for providing infrastructure management services.
ZIL has competitive advantage in the SME space as it provides remote IT infrastructure software with back-end NOC. Though there are players who have develop IT infrastructure management software, they give software on license fee basis. ZIL’s NOC acts as an entry barrier for any other competitor that intends to offer such solutions. Besides, the company is bundling new features like anti- virus, disaster recovery, and back up facilities; this would make its service offering comprehensive and difficult to compete for any potential competition.
ZIL is looking out for space to build a bigger NOC. For this expansion, the company plans to incur a capex of Rs 36 crore in FY08.
Banking software and branch automation business focussed on small banks
ZIL’s banking products mainly focus on the IT needs of the cooperative, rural, and semi-urban banks. It offers a branch banking product for computerisation of an individual branch and also to integrate an individual branch with core banking solutions. The company provides complete solutions to the branch, including hardware, software, and after sales services. The company has completed automation of 3600 branches for 114 customers.
The future growth in this business will be mainly driven by maintenance revenues. Moreover, in the current client base, close to 6000 branches are non/partially computerised, offering a large business opportunity for ZIL. The company is also likely to generate revenues from upgrading its client base to core banking product. Moreover, healthy growth in new client base and change in regulations leading to increasing technology spending by banks would drive the growth in ZIL’s revenues.
The business is also likely to see improved profitability because the company is likely to enhance its focus on the high-margin maintenance and software part of the business.
Soaring financials
For the quarter ended September 2007, the company registered sales growth of 78% to Rs 26.68 crore. OPM improved from 54.4% to 54.9%. This took OP up by 80% to Rs 14.66 crore. Other income rose from Rs 4 lakh to Rs 38 lakh. Even as interest cost soared (up 1192% to Rs 1.55 crore) and depreciation zoomed (138% to Rs 3.66 crore), PBT went up by a good 51% to Rs 9.83 crore. As provision for tax gained 35% to Rs 58 lakh, PAT went up by a solid 52% to Rs 9.25 crore.
For the six months ended September 2007, the company registered sales growth of 79% to Rs 50.23 crore. OPM improved from 54.5% to 55.3%. This took OP up by 81% to Rs 27.78 crore. Other income rose from Rs 4 lakh to Rs 38 lakh. Even as interest cost soared (up 776% to Rs 2.54 crore) and depreciation zoomed (171% to Rs 6.73 crore), PBT went up by a good 48% to Rs 17.39 crore. As provision for tax jumped 81% to Rs 1.50 crore, PAT went up by a solid 48% to Rs 17.39 crore.
Impressive sequential growth
Though the company’s financials cannot be compared sequentially as it is domestic focused, it has been successful in registering a good double digit growth in sales and as well as net profit in the last four quarters.
It registered sequential sales growth of 20% (to Rs 18 crore) in December 2006 quarter. In March 2007 quarter, sales grew sequentially by 12% (to Rs 20.10 crore). In June 2007 quarter, it registered sequential sales growth of 17% (to Rs 23.55 crore). And in the latest quarter ended September 2007, its sales grew 13% to Rs 26.68 crore. During the same time, its net profit sequentially rose 7% (to Rs 6.54 crore), 9% (to Rs 7.14 crore), 14% (to Rs 8.14 crore, and 14% (to Rs 9.25 crore).
Attractive valuation
In FY 2008, we expect the company to register sales and net profit of Rs 109.44 crore and Rs 39.10 crore, respectively. On equity of Rs 11.79 crore and face value of Rs 10 per share, EPS works out to Rs 33.2.
In FY 2009 we expect the company to register sales and net profit of Rs 148.18 crore and Rs 54.53 crore respectively. EPS works out to Rs 46.3. The share price trades at Rs 431. While P/E on FY 2008 EPS works out to just 13.0, it falls to an attractive 9.3 on FY 2009 EPS. Being a fast growing product-oriented company focussed on one of the fastest segments of the IT industry (remote IT infrastructure management) with significant presence in domestic market as well as established global alliances, ZIL’s current valuations are attractive.
| | 0503 (12) | 0603 (12) | 0703 (12) | 0803 (12P) | 0903 (12P) |
| Sales | 21.91 | 35.37 | 66.97 | 109.44 | 148.18 |
| OPM (%) | 19.3 | 34.5 | 54.1 | 55.3 | 55.8 |
| OP | 4.23 | 12.22 | 36.25 | 60.52 | 82.74 |
| Other inc. | 0.30 | 0.12 | 0.14 | 0.58 | 0.78 |
| PBIDT | 4.53 | 12.34 | 36.39 | 61.10 | 83.53 |
| Interest | 0.10 | 0.17 | 3.67 | 6.04 | 7.85 |
| PBDT | 4.43 | 12.17 | 32.72 | 55.06 | 75.67 |
| Dep. | 0.46 | 0.56 | 5.02 | 13.08 | 17.66 |
| PBT | 3.97 | 11.61 | 27.70 | 41.98 | 58.02 |
| Tax | 0.39 | 0.87 | 1.67 | 2.89 | 3.48 |
| PAT | 3.58 | 10.74 | 26.03 | 39.10 | 54.53 |
| EPS* (Rs) | 3.0 | 9.1 | 22.1 | 33.2 | 46.3 |
| *Annualised on current equity of Rs 11.79 crore. | |||||
| Zenith Infotech: Results |
| | 0709 (3) | 0609 (3) | Var. (%) | 0709 (6) | 0609 (6) | Var. (%) | 0703 (12) | 0603 (12) | Var. (%) |
| Sales | 26.68 | 14.96 | 78 | 50.23 | 28.12 | 79 | 66.97 | 35.37 | 89 |
| OPM (%) | 54.9 | 54.4 | | 55.3 | 54.5 | | 54.1 | 34.5 | |
| OP | 14.66 | 8.14 | 80 | 27.78 | 15.33 | 81 | 36.25 | 12.22 | 197 |
| Other inc. | 0.38 | 0.04 | 850 | 0.38 | 0.04 | 850 | 0.14 | 0.12 | 17 |
| PBIDT | 15.04 | 8.18 | 84 | 28.16 | 15.37 | 83 | 36.39 | 12.34 | 195 |
| Interest | 1.55 | 0.12 | 1192 | 2.54 | 0.29 | 776 | 3.67 | 0.17 | 2059 |
| PBDT | 13.49 | 8.06 | 67 | 25.62 | 15.08 | 70 | 32.72 | 12.17 | 169 |
| Dep. | 3.66 | 1.54 | 138 | 6.73 | 2.48 | 171 | 5.02 | 0.56 | 796 |
| PBT | 9.83 | 6.52 | 51 | 18.89 | 12.60 | 50 | 27.70 | 11.61 | 139 |
| Tax | 0.58 | 0.43 | 35 | 1.50 | 0.83 | 81 | 1.67 | 0.87 | 92 |
| PAT | 9.25 | 6.09 | 52 | 17.39 | 11.77 | 48 | 26.03 | 10.74 | 142 |
| EPS* (Rs) | 31.4 | 20.7 | | 29.5 | 20.0 | | 22.1 | 9.1 | |
| *Annualised on current equity of Rs 11.79 crore. | |||||||||
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