Rise and Fall of Zylog Systems:

Zylog Systems Limited namely ZSL in USA and Zylog in other geographies was established in 1995 by Sudarshan Venkataraman. The company is a CMMI certified provider of Onshore, Offshore & Near shore technology solutions and services to enterprises & technology companies across the globe and is a Public Limited Company, listed in the Bombay Stock Exchange (BSE 532883) and National Stock Exchange (NSE ZYLOG) in India.

Zylog shares fell by 62% in span of 15 days. The stock is constantly locked in lower circuit. We tried to understand the profile of the company and the reasons behind the recent crash. Read on to know more...

• The Company provides software development and consulting service.
• Zylog derives more than 90 per cent of its revenues from the US and Canada. This geographic mix has meant that the company has remained largely insulated from the debt crisis and slowdown in Europe both in 2008 and 2011. 
• The company is steadily increasing focus on product and solutions-driven revenues, which may lead to improvement in margins over the next few years.
• Zylog’s utilisation rates, at more than 87 per cent, are among the highest in the industry. This elevated level of utilisation means that the company has managed to drive significant volumes-based growth.
• Focusing on the e-governance initiatives globally
• In India Zylog is into banking and e-governance. With growing e-governence projects, the opportunity is estimated to be around Rs.20000 Crs.
• Pocketed implementing smart card projects with a couple of state governments
• Implemented WIFI zone in a seven square kilometre area in Chennai as pilot project.

Company History:

• 1995 - Zylog Systems Limited established in Chennai, TN, India
• 1996 - Opens Sales & Marketing office in Edison, NJ, USA
• 2004 - Zylog Europe incorporated
• 2004 - Acquires IMPEKsoft and JDAN Systems
• 2006 - Establishes IDEA Lab, the Research & Development Division
• 2007 - Acquires EWAK Soft
• 2007 - Acquires Anodas Software Ltd in UK 2007 – Releases IPO through BSE & NSE
• 2008 - Acquires Ducont FZ, LLC headquartered in Dubai Internet City, UAE
• 2008 - Opens a new Global Software Development & Research Centre in Chennai, India
• 2009 - Launches Wi5 broadband services in India
• 2010 - Acquires Brainhunter, Canada
• 2011 – Achieves IBM Premier Partner Status for US & India Location
• 2012 - Joins Microsoft Platform Modernization Alliance
• 2012 - Joins Oracle Modernization Alliance (OMA)

Awards

• VAR Business has awarded ZSL “Top Technology Practices” award for its excellence in “Green Computing for the year 2008”.

• ZSL Announced as Finalist under Cloud Innovation & Impact Best of Show Categories at IBM Impact 2012

• ZSL's Powercube DaaS – the Virtual Desktop Solution Won Runner Up Award for Green IT's Virtualization Product of the Year 2012

• Zylog Systems Ltd (ZSL) Listed as Fastest Growing Mid-Sized Enterprises for the Year 2011 by India Inc 500
• Listed as 'India's Most Valuable Companies" @ ranks #533 in the Business Today 500: The Next 500 companies in 2009. During the previous year ZSL was ranked #580 in the analysis

• ZSL Received 2011 Cloud Computing Excellence Award

• ZSL’s SmartPrise Cloud Manager Won NJTC's Cool Products Competition Runner-up Award for the Year 2011

• ZSL's SmartPrise Social CRM Won CRN Technology Award 2011 in the Software Productivity Category

• ZSL Won Runner-up Award for the Mobile Technology Project of the Year 2011 Award from DM Magazine, UK

• ZSL Listed as the Top Cloud Computing Service Provider by Talkin' Cloud TC 50 Award

Current Crisis:

• The stock plunged nearly 62% in the past 15 trading sessions to its lowest closing in over two years. But the bigger question now is: what exactly triggered that sell-off and where can the company go from here?
• Brokers claim that promoters faced problems in raising funds to meet margin calls, forcing lenders to liquidate pledged shares. Zylog's CFO Srihari SP blamed the crash to a speculative attack. "We have a strong reputation in the market and we are confident that we will be able to come out of this soon," he said.
• The stock's downfall began on October 18 with Karvy Financial Services selling 2.5 lakh shares though a bulk deal on BSE. Srihari said the lenders did not inform the promoters about the margin requirement and also they were not aware of the sale of pledged shares.
• "When there is a fall in share prices, then there is always an official intimation given by the lender to the borrower of margin fall and time is given either to top up this fall by additional shares or cash before the next morning... technically speaking, this means that both cannot happen on the same day... In our case, the sale happened first and the margin call reason was cited for this sale which itself explains the truth. We have built the company brick by brick over the past 17 years and grown despite some of the worst business challenges in 2001 and 2008," he said.
• The stock is locked in lower circuit for the last few days, indicating that investors are still not convinced. At Monday's closing, its market cap was Rs 357 crore. Its revenues for FY12 were at Rs 2,273 crore and PAT at Rs 205 crore. In short, the company is available for 0.16 times its FY12 sales, and 1.74 times its FY12 net profit. Promoters held 42.5% at September end, of which 52% is pledged. They have increased holding from 36.6% in the June 2011 quarter following a robust performance.
• Zylog officials say they have the financial strength to withstand the crisis. The promoters will have to clarify about the percentage of shares pledged and the way to relieve pressure on the stock. Investors may then have a chance to weigh options.

Valuation:

• Crisil has been covering this stock and had been maintaining a price target of Rs.656 prior to stock split. Infact the stock reached Rs.620 per share prior to stock split.
• Zylog Systems stock split from face value of Rs.10 to Rs.5 was completed on 03 July 2012, resulting in share price of Rs.310.
• But the recent crash of 62% in stock price, that too in span of 15 days resulted in the share price at Rs.103.
• On papers, the valuations look extremly attractive.
• Against a book value of Rs.251 and EPS of 52, the stock trades at PE of 1.95 and Dividend yield of 4.84.