Zylog Systems Q2 FY 2011: Strong Growth Continues

Zylog Systems delivered superb results for Q2 FY 2011. On a consolidated basis, Zylog Systems‘ gross revenue was Rs. 474.46 crores in Q2 FY 2011 as compared to Rs. 220 crores in Q1 FY 2010, a rise of 115%. The Net Profit rose to 37.52 crores as compared to Rs. 24.63 crores on a YOY basis showing an increase of 52%. The best part is that there has been no equity dilution and so the EPS rose from Rs. 14.98 to Rs. 22.82, an increase of 52%.

Zylog Systems‘ results on a half-year basis were also impressive. Zylog Systems‘ consolidated gross revenue increased from Rs. 414.40 crores to Rs. 937.85 crores while Zylog Systems‘ Net Profit increased from Rs. 41.98 crores to Rs. 72.80 crores. Zylog Systems‘ EPS for the half-year of 2010-11 stands at Rs. 44.27 as compared to Rs. 25.53 in the half year of 2009-10.

Zylog Systems‘ borrowings increased from Rs. 206 crores to Rs. 499 crores. The present debt-equity stands at 1:1.86 which is not unreasonable. Zylog Systems had cash and bank balances of Rs. 298.43 crores.

The reason for the steep jump in Zylog Systems‘ top-line and bottom-line is the acquisition of a loss-making company named ‘Brainhunter’ in February 2010. Brainhunter is one of the largest staffing companies in Canada. Zylog Systems paid USD 33 mn for the acquisition (see Zylog Systems – Growing At A Scorching Pace)

Zylog Systems is a good bet for investment because it has always had a good growth trajectory. Zylog Systems‘ 3 Year CAGR gross revenue have grown at 33.98% while its’ 3 Year CAGR Profit has grown at 22.53%.

For the immediate foreseeable future, Zylog Systems has two major growth drivers. The first is BrainHunter which will contribute to a larger extent to the topline and the bottom-line of Zylog Systems. The second is that Zylog Systems (through a subsidiary) will invest Rs 200 crore to expand its ‘Wi5’ wireless broadband services in five metropolitan cities Delhi, Mumbai, Bangalore, Hyderabad and Kolkata in coming two years. A category A internet service provider license to operate in all of India`s DoT circles has been obtained for this purpose. Zylog Systems expects to garner business worth Rs. 500 crores from this business in the next five years.

Zylog Systems has also announced that it is interested in the acquisition of offshore companies, one of which specializes in the development of Advanced Technology products and solutions to federal, state and local governments and the other in Asia Pacific Region (Malaysia/Singapore) which specializes in E-Governance, Health-care Solutions, Hospital Management Systems.

Zylog Systems also recently launched a Cloud-enablement and legacy modernization platform, PowerMigrator, based on IBM WebSphere, SOA, DB2 & AWS technologies.

At the present market price of Rs. 571, Zylog Systems is quoting at a PE of 9.16 on the basis of the FY 2009-10 EPS of Rs. 62.30. If Zylog Systems continues the strong showing in the next two quarters, its EPS can be expected to Rs. 88.54 (double the half-years EPS of Rs. 44.27) at which stage Zylog Systems will have a PE of 6.44 which is quite reasonable for a company with the kind of track record and growth prospects that Zylog Systems has.

So while Zylog Systems offers the prospect of increased growth and profits die to organic and inorganic growth, Zylog Systems also provides the comfort of low valuations and good financial position. This favourable risk-reward ratio makes Zylog Systems investment-worthy (see also Zylog Systems – Growing At A Scorching Pace)