Zylog Systems‘ under-performance is quite mystifying given its superior results. When we first spotted Zylog Systems in July 2010, it was quoting at a price of Rs. 515 (see Zylog Systems – Growing At A Scorching Pace).
By the time of the Q2 FY 2011 results, the price had crawled to Rs. 571 (see Zylog Systems Q2 FY 2011: Strong Growth Continues). Now, despite superior quarterly results for the third Quarter & nine month period ended December 2010, the price has slumped to Rs. 374.
There is nothing in the results to justify this kind of price behavior in the shares of Zylog Systems.
Zylog Systems’ Quarterly Results
| (Rs cr) | Dec 2010 | Dec 2009 | YOY |
|---|---|---|---|
| Operating Income | 476.59 | 226.46 | 110.45 |
| Total Expenses | 387.70 | 176.88 | 119.19 |
| Operating Profit | 88.89 | 49.58 | 79.29 |
| Other Income | -14.90 | 3.37 | N.A |
| PBDIT | 73.99 | 52.95 | 39.74 |
| PBT | 48.22 | 39.47 | 22.17 |
| Adjusted Net Profit | 38.39 | 28.87 | 32.98 |
For the 3rd Quarter of 2011, Zylog Systems‘ gross revenue spurted to Rs. 476.59 crores as compared to Rs. 226 crores in the Quarter ended December 2009, a huge spurt of 110%. The adjusted net profit rose from Rs. 28.87 in December 2009 to Rs. 38.39 crores in December 2010, a jump of 33%. The results for the nine month period were equally encouraging with revenues increasing to Rs. 1,414 crores as compared to Rs. 640 crores while the net profit increased to Rs. 111 crores as compared to Rs. 70 crores in the preceding 9 month period.
Zylog Systems‘ consolidated & diluted EPS for the three month period ended December 2010 was Rs. 23.34 as compared to Rs. 17.56 in the same period for the last year while the EPS for the 9 month period ended December 2010 was Rs. 67.61 as compared to Rs. 43.08 in the same period last year.
In the year ended 31st March 2010, Zylog Systems reported a consolidated diluted EPS of Rs. 62.30 and on that basis the CMP of Rs. 374 is discounted 6 times. The EPS for the 9 month period ended December 2010 was Rs. 67.61. By simple extrapolation, the EPS for the year ended 31st March 2011 may be in the region of Rs. 90 or so. If that is achieved, the CMP will be discounted a mere 4.15 times.
At this moment, given that there is nothing in the results to show why the price of Zylog Systems has slumped, one can only speculate that it is a market “aberration” and one should profit from it. Certainly, the risk-reward ratio appears to be in favour of making an investment in Zylog Systems‘.
It is heartening to note that on 4th February 2011 Axis Bank bought 2,50,000 shares of Zylog Systems at a price of about Rs. 406 per share for a total consideration of about Rs. 10.15 crores. So, one is at least in good company!
Zylog Systems has also come on record that it is scouting for acquisitions in the United States of around $100 million (around Rs 450 crore) to strengthen its presence in that region. S P Srihari, Chief Financial Officer of Zylog Systems was quoted as saying that about eight companies were on Zylog Systems‘ radar. These companies are operating in the high-margin segments like Banking, Financial Services and Insurance (BFSI), pharma and healthcare and SAP services. Zylog Systems is likely to finalize the blueprint by third quarter of the current fiscal. If this materializes, there would be a catalyst for Zylog Systems share price to spurt.
I have been holding this stock since feb.2009.
Again bought more stocks in July-sept.2010 between 510-567 rs.
Before i write any further – consider these figures on a standalone basis – operating margins are 23.12%; Net profit margin – 15% (now this is good stuff)
Considering their first qtr. results i felt that their fair valuation is Rs.1500, but that did not happen.
Now their third qtr. results amply prove it.They are on a new and higher pleateau.
Their cash eps (source:(source:http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=532883))
on a standalone basis for the first 3 qtrs, is rs 76 and on a consolidated basis would around 27-28 so we can safely assume that their cash eps is Rs.110 (consolidate basis).
And going by what Mr. P. Srihari has said in a interview, without acquisitions they are going to grow at 10%-15% p.a. next year and with acquisition they are going to grow at 25%p.a. next year. so that gives a consolidated cash eps of more than Rs.120.
Now assuming a p/e ratio of 15, this company should be valued at more than 1800 per share.
So i feel fair valuation for this stock is betn. 1800-2400 rs. per share.
Also consider that- this company’s business model is different from the business model of other Mid tier IT companies, and over a period of time the subsidiaries will start contributing more to the bottomline and also increase the profit margins.
(logic for p/e-15: earnings yield would be 6.66%, 166 basis points more than the 5% inflation rate which by RBI is considered to be the right and comfortable inflation rate for India. And in normal circumstances also a usual FD rate- note: the present inflation rate & FDs are abnormal and unsustainable)
i have purchased zylog and tulit telecom