Stock Review: Zylog Systems

 

Zylog Systems has been reporting decent growth in its financial numbers over the past few quarters. Its focus on the inorganic strategy and various expansion plans offer a positive outlook for the company, going ahead. Its scrip has remained more or less stagnant over the past six months in an otherwise volatile market. The ET Infotech index has fallen over 20% during the period.

The company earns over 60% of its revenue from IT services while the balance comes from the products and solutions business. The company has traditionally adopted inorganic route to expand its market reach and product portfolio with over five acquisitions in the past three years. During the June 2011 quarter, the company's topline grew 2.5% sequentially to . 514 crore due to business traction in healthcare and e-governance verticals. The operating profit margin grew 80 bps to 17.1%.

During the quarter, Zylog's bottomline grew over 30% to . 45 crore. The jump was largely due to . 8.5 crore of other income incurred during the quarter against sale of 1.7 acres of land in Chennai. Excluding this one-time income, net profit would have rose 17% to . 39.8 crore. Zylog plans to use the proceeds to build office property in more costbeneficial geographies such as Malaysia and Dubai.
With a strong order pipeline of more than $200 million to be executed within the current fiscal, the company has a cash balance of . 310 crore on its books. It plans an acquisition in the range of $75 million to $100 million targeting enterprise applications players.

Currently, Zylog is offering Wi-Fi services in six states and plans to expand its footprint in Haryana and Rajasthan in the coming quarters. It expects e-governance and Wi-Fi to be the key growth drivers in the domestic market, going ahead. At the current market price of . 402.5, the stock trades at 4.3 times its earnings for the trailing twelve months. Given the company's appetite to grow inorganically and demand traction in various business areas, Zylog is expected to fare well in the coming quarters. However, with over 90% of the revenues coming from the US and Canada, any slowdown in demand from the region and currency fluctuations may act as a headwind. The company does not expect the contribution from these geographies going down below 75% in the near term.