**[investwise]** Zylog Systems-BUY with a target of Rs 780 [1 Attachment]

 

[Attachment(s) from Maverick included below]

Zylog Systems: Exuding Promise   Zylog Systems, incorporated in '97, is a Chennai-based diversified IT solutions provider. The stock has shown good movement in past one year owing to good results and business fundamentals. Its topline is expected to double in FY11E owing to a expanding client base due to a big ticket acquisition (Brainhunter, a Canadian company).   The company has also diversified into eGovernance and rural WiFi businesses, and is profitable in both, notwithstanding the rising competition. Major growth has come from IT solutions, the core business of the company. In Q1FY11, its revenue more than doubled sequentially, majorly due to Brainhunter, a Canadian IT services company that Zylog acquired in FY10. Significant cash reserve and having net-debt on its books enables Zylog to become risk taking and look for more acquisitions.   The company has 65%-35% distribution of workforce on onsite: offshore locations, thus differentiating itself from other Indian IT services companies, which have more resources at offshore. One reason of this is that Zylog is more focused on staffing and application building projects, and has less maintenance projects.   • Revenue in FY10 have been `9,799.4 mn, from `7,510.4 mn in FY09. Revenue in Q1FY11 has been `4,633.9 mn, up 118% from Q4FY10 revenue of `2,118.4 mn. We believe FY11E revenue can clock a growth of ~100% from FY10 levels, and rise to `18,778 mn.   • EBITDA margin has improved from 9.7% in FY09 to 15.6% in FY10, but Net Margin has reduced from 11.1% to 10.5%, due to higher tax rate (12.5% to 21.2%).   • EPS has improved from `50.88 in FY09 to `62.30 in FY10. Our analysis shows that EPS can further grow to ~`92 in FY11E and ~`121.66 in FY12E.   • The company has cash reserve of `2,835.5 million. Considering the debt of `2,000 million on books, net cash is `835.5 million, thus making Zylog a zero net-debt company.   We value Zylog stock at 8.5x its FY11E EPS of `92 to arrive at March-11 target price of `782, signifying a potential upside of 44%. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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Attachment(s) from Maverick

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Zylog-Jaypee.pdf

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