IPO BUZZ

Zylog Systems — IPO: Invest at cut-off Investors with a one/two-year perspective can subscribe to the initial public offer from Zylog Systems, considering its business prospects and reasonable asking price. Zylog is a Tier-2 software services and solutions provider to a predominantly US clientele. The company provides services such as application development and maintenance, enterprise infrastructure management and quality assurance and testing. It also has product platforms for seamless integration of various software applications for telecom, manufacturing and banking clientele. Additionally, Zylog derives significant revenues from partnering with system integrators/solution providers, independent software vendors (ISV) and value-added resellers (VAR).Business Outlook The company, which began operations in 1996, is different from the typical IT outfit, in that it generates 81.5 per cent of its revenues from services rendered onsite. While BFSI (Banking Financial Services and Insurance) and telecom are its key operational verticals (together contributing 56 per cent of revenues), Zylog generates significant revenues from retail, manufacturing and healthcare verticals. Zylog’s revenues have grown at a compounded annual growth rate of about 58 per cent the past four years, driven by certain key operational metrics and strategic moves.Zylog’s business is driven by the software solutions that it offers and a ‘collaborative sales model’. The latter means that it acts as a channel partner for some big international players such as Sun, Microsoft, and HP. Besides helping the company tap the business of these players, this model aids it to acquire clients independently through aggressive marketing. Zylog derives its revenues from servicing specific business units of large corporations rather than by providing enterprise-wide solution(s) that larger players offer. Apart from making the business less volume driven, this strategy enables greater focus, allowing Zylog to provide tailored IT, consulting services and product platforms to its clients. The association with the bigger players has also, over the years, given it greater scope for value-addition to the international players’ portfolio as well as its own.Second, the company derives 46 per cent of its revenues from fixed price billing, which is milestone-based. This indicates that the company may have robust means of estimating timelines and expertise required towards completion of projects. This could help in smoother revenue realisations. Third, the top 10 clients contribute 25.6 per cent of its revenues, indicating that client concentration risks are not high. MCI, its top client, a telecom company in the US, contributes about 4 per cent of its revenues. A healthy trend in client additions (the company has 16 million dollar clients) and a repeat business percentage of 88.9, are positive indicators. Valuation At the upper end of the price band, the offer values the company at about 11 times the current earnings, on the post-offer equity base. This is at a discount to other Tier-2 IT services companies such as i-Gate, Hexaware and Mastek. The EBITDA (earnings before interest depreciation and amortisation) margin at 17.1 per cent compares reasonably well with that of i-Gate and Mastek


The public issue of Zylog Systems Ltd. will hit the primary markets on July 20. The company has fixed the price band of its initial public offering at Rs 330-350, said an official from Motilal Oswal, book running lead manager to the issue. Zylog Systems will be issuing 36 lakh equity shares of face value Rs 10 each through 100% book building process. At the lower price band, the company will mop up Rs 118 crore and at the cap price it will raise Rs 126 crore. Zylog plans to utilise the proceeds for developing and expanding its business to set up two state-of-the-art offshore development centres, fund acquisition and strategic investments and to meet the increasing working. Zylog Systems is a global services provider delivering technology-driven business solutions. It is a 100% export oriented unit, registered with the Software Technology Parks of India and provides technology services to client specific requirements.