Saturday, July 21, 2007

Zylog Systems IPO - Invest at cut-off

Zylog Systems, promoted by first generation entrepreneurs Sudarshan Venkatraman and Ramanujam Sesharathnam, is a global services provider delivering technology driven business solutions. The major focus is application development and integration including web application, web services, application integration, business Intelligence, data warehousing and mobile and wireless applications; enterprise infrastructure management and quality assurance & testing. The company also has a few products -- Z*Connect and Z*Prism -- in the telecom space, insured vehicle accident recovery system and claims management systems in the insurance space; RTGS PayManager, VISTEM and WAP Page in the banking, financial services and insurance (BFSI) space.

Over the last four years, Zylog Systems has made five acquisitions. The company operates through two global development centres in Chennai. It has overseas branches set up across the US. The US headquarter is located in New Jersey. Subsidiaries have also been set up in Singapore and United Kingdom. But 98% of the revenue is derived from clients located in the US. About 81.50% revenue comes from services performed onsite, up from 80.73% in the year ending March 2006 (FY 2006).

End March 2007, ZSL had 133 consultants and 835 permanent employees with 635 technical staff and 127 support staff. The attrition rate of the software professionals was 21.9% per annum in FY 2007.

The number of clients increased to 259 clients in FY 2007, from 196 in FY 2006. The million-dollar clients increased to 16 in FY 2007, from six in FY 2006. Repeat business constituted 88.9% of revenue in FY 2007, up from 70.7% in FY 2006. Top client contributed 3.84% (2.60% in FY 2006) of revenue, top 5 clients 15.44% (10.79%), top 10 clients 25.67% (18.27%) and million-dollar clients 34.31% (12.56%).

In industry verticals, BFSI contributed 34.12% in FY 2007 (39.94% in FY 2006), telecom 20.96% (20.96%), retail 8.20% (5.27%), manufacturing 7.32% (12.20%), pharma/healthcare 7.83% (5.33%) and others 20.53% (16.30%).

In service verticals, consulting contributed 22.65% in FY 2007 (36% in FY 2006), development 44.95% (34.60%), maintenance 6.57% (7.70%), package implementation 13.43% (8.80%), testing 3.60% (5.20%), application support 3.78% (4.70%), network support 1% (1.10%) and others 4.02% (1.90%).

The net proceeds of the issue along with preferential allotment of Rs 43.88 crore and term loan of Rs 13.15 crore will be utilised for setting up Offshore Development Centres (ODCs) in Chennai, acquisitions/strategic investments and meeting working capital needs.


Strengths

  • Over the last four years, operating revenue grew at a CAGR of 58.5% and net profit at a CAGR of 76.7%. This is a consistently good performance.
  • Operating profit margin (OPM) is at 17-18% level, in line with its onsite focus. Going forward, offshoring will increase leading to improvement in margin due to the setting up of ODCs.
  • Acquisitions will expand clients and geographic presence, enabling cross-selling of services and solutions.
  • Unlike other medium-sized IT companies, not dependent on handful of customers. In FY 2007, 95% of the revenue was from Top 145 clients, with Top 10 clients contributing 25.70%. Also, repeat business accounted for 88.90%, up from 70.7% in FY 2006.


Weaknesses

  • Onsite-focused companies are more prone to visa-related issues and anti-outsourcing rhetoric.
  • OPM has been continuously falling every year, from 29.9% in FY 2003 to 17.1% in FY 2007.


Valuation and Recommendation

The IPO is priced between a band of Rs.330-350. At the upper band, the company is priced at 10.5x its FY07 diluted EPS of Rs.33.36 and at 7.25x its FY08E EPS which looks quite cheap as compared to its peers. The FY08 EPS is arrived at a conservative sales growth of 50% and net profit growth estimate of 45% against 79% net profit CAGR from FY05 to FY07. We believe the company has a potential to give solid listing gains. We strongly recommend our investors to Subscribe to the issue.

Reference:- www.capitalmarket.com

ANURAG DUJARI
Mobile - 09831909904, 09883059291, 09433988791, 09330911514
Messenger ID - anurag130
E-Mail - anurag130@yahoo.com
BLOG - www.trade4gain.blogspot.com

Disclaimer and Terms of Use: Stock market is subject to risk. High risk high gain is the key to stock market. We are not responsible for any loss or profit associated with stocks mentioned on this site/ by us. Under no circumstances will we be held liable for losses incurred due to information presented anywhere on the site or given through yahoo messenger or SMS. Please do your own research before establishing an equity/ derivatives position in a company. Not all stocks recommended by us are suitable for your investment needs. Carefully evaluate your own risk appetite. Any error in this document cannot be claimed by anyone. The articles on this site are not written by a registered investment advisor. The author may or may not be holding a position in companies that are being analyzed. More likely than not, the author will have an interest in the stock mentioned.

Thursday, July 19, 2007

Omaxe IPO - Invest at cut-off

Omaxe (OL) is a real-estate development and construction company promoted and founded by Rohtas Goel. Commencing operation as a construction and contracting company, it has completed 120 construction projects. Now, its focus is fully on development of residential and commercial real-estate projects ranging from integrated townships, group housing and retail and other commercial properties, hotels, information technology and bio-tech parks to special economic zones.

After entering the real-estate business in 2001, OL has completed eight residential projects consisting of seven group-housing and one integrated township projects, and two commercial projects including retail and office space, covering an aggregate built-up/ developed area of approximately 5.13 million sq. ft.

End March 2007, OL had 52 residential and commercial projects, consisting of 21 group-housing projects, 16 integrated townships, 14 shopping malls and commercial complexes and one hotel, either under development or under various stages of approvals for development. Of these 52 projects, 38 are under development and 14 in various stages of approvals for development. The company expects to commence development of these 14 projects in the current year ending March 2008 (FY 2008). The 16 integrated townships are essentially ‘mixed-use’ areas consisting of residential and commercial projects and are expected to include 10 group-housing projects, 16 commercial developments, one biotech park and one information technology park. It is also developing projects in the hospitality sector. Its hotels at Amritsar, Greater Noida and Patiala are part of commercial malls under construction. OL has applied for change of land use for its hotel project in Faridabad.

Most of OL’s residential developable space is in non-NCR locations of northern India. Just 19% of the space from the current group-housing projects that can be developed is either under development or in various stages of approval in the national capital region (NCR). All the township projects are in Tier II and III cities/ towns in north India. However, the share of NCR region in the total commercial space that can be developed is 49%.

On November 21, 2006, OL entered into a joint venture with Azorim International Holdings, a part of a leading Israeli real-estate development group. The joint venture is for the construction and development of Omaxe Forest, an ultra-luxury group-housing development in Faridabad. Under the terms of the agreement, of the total area of approximately 36.22 acres, the company will transfer approximately 20.58 acres representing approximately 1.8 million sq. ft. of saleable area to the joint venture entity in which Omaxe and Azorim International will hold an equal stake of 50%.

End July 2007, OL expects an outstanding of Rs 88.97 crore against land purchased. Part of the proceeds will be used for payment of that outstanding along with funding of about Rs 236.03 crore for future land acquisitions. Apart from land acquisition and project development cost, the company is also expected to retire in FY 2008 Rs 200-crore high-cost debts raised from financial institutions.


Strengths

1* Access to land reserve of approximately 3,255 acres end March 2007. Total land reserve includes about 571 acres belonging to joint ventures and collaborations in which OL has an economic interest of approximately 74% calculated on a weighted average basis. It owns 31% of the land reserve directly or through its subsidiaries and has sole development rights on 46% of the land bank. About 6% of the land has been allotted by the government and its agencies on a long-term lease of about 90/99 years.

2* Of the total land reserves, around 3096 acres (including approximately 451 acres belonging to joint ventures and collaborations) relate to projects that are currently under development or in various stages of approval for development, representing approximately 150 million sq. ft. of saleable area. Of the 150-million sq ft saleable area, about 66.6 million sq ft will be for group housing and 77.3 million sq ft developed into township and 4.89 million sq ft reserved for commercial purpose.

3* One of the first developers to conceptualise and develop theme malls in north India. OL conceptualised wedding mall: the one-stop shop for wedding arrangements. Given the strong supply glut in the retail space in the NCR region, this ability to differentiate its property will hold good in attracting tenants and retaining them.

4* Adoption of percentage completion method means revenue recognition starts only if the actual cost already incurred on the date of financial statement is at least 30% of the total project cost as estimated by the management. In FY 2008, OL is likely to recognise revenue for more projects out of the current 38 projects as against 23 projects in the previous year.


Weaknesses

1* Ventured into realty business only in 2001 and has completed just eight projects since then. Was only a construction contractor since 1989. Despite longer track record as a construction contractor, OL decided not to take up any more construction contracts since March 2006 as the margin in the realty business is higher. As a company with limited track record in this business, it is more prone to cyclical ups and downs of the business.

2* The strong rise in real-estate prices and rising interest rates are likely to impact the affordability of housing. Real-estate prices are already showing signs of softening in certain locations

3* Effective tax rate stood at 20.18% in FY 2007 largely on account of benefits availed under Section 80-IB of the Income-Tax Act, 1961. For projects approved on or before March 2007 and completed within four years, OL is eligible for this benefit, subject to conditions. New projects approved after this date will not be eligible for this benefit. Hence, the company’s tax incidence is set to increase.

4* Operating cash flows in recent fiscals are negative. Operating cash flow for FY 2007 is negative Rs 713.13 crore. The comparative figure is Rs 131.06 crore in FY 2006. Strong negative operating cash flow is primarily on account of a sharp rise in projects in progress. This was Rs 839.75 crore end March 2007 compared with Rs 544.30 crore end March 2006. The inventory, too, has increased to Rs 192.08 crore end March 2007, from Rs 111.52 crore end March 2006.

5* Ol does not own the ‘Omaxe’ brand. It is owned by its Chairman and Managing Director. Rohtas Goel. Under a license agreement dated October 1, 2005, the company had to pay a lumpsum amount of Rs 1.2 crore and a royalty fee at the rate of 2% of its annual real-estate turnover. Accordingly it paid Rs 13.2 crore on this account in FY 2006. But from FY 2007, Goel has exercising his rights of renunciation, and has agreed to receive fixed payment of Rs 10 lakh per annum as royalty. Further, the license agreement expires end March 2008.


Valuation

Total income posted a CAGR of 77.34% to Rs 1439.67 crore in FY 2007 to Rs 145.56 crore in FY 2003. CAGR in profit after tax and minority interest was 171.04% to Rs 257.26 crore in FY 2007, from Rs 4.77 crore in FY 2003.

At the offer price band of Rs 265-310, Omaxe’s PE works out to 17.8 – 20.8 x FY2007 EPS of Rs 14.9 (consolidated) on post issue equity of Rs 1727.5 million. On a relative comparison, Omaxe trades at a lower PE & M.Cap/Sales basis.

Using NAV method, we arrive at a Net Asset Value of Rs 487 per share which is 57% above the upper band of the price range of Rs 265- Rs 310.

We feel, company’s strong brand image, focus on Tier2 & Tier 3 cities and lower valuations compared to peers to be major positives. We recommend a subscribe to the issue.

ISSUE CLOSES TOMORROW

Reference:- www.capitalmarket.com

ANURAG DUJARI
Mobile - 09831909904, 09883059291, 09433988791, 09330911514
Messenger ID - anurag130
E-Mail - anurag130@yahoo.com
BLOG - www.trade4gain.blogspot.com

Disclaimer and Terms of Use: Stock market is subject to risk. High risk high gain is the key to stock market. We are not responsible for any loss or profit associated with stocks mentioned on this site/ by us. Under no circumstances will we be held liable for losses incurred due to information presented anywhere on the site or given through yahoo messenger or SMS. Please do your own research before establishing an equity/ derivatives position in a company. Not all stocks recommended by us are suitable for your investment needs. Carefully evaluate your own risk appetite. Any error in this document cannot be claimed by anyone. The articles on this site are not written by a registered investment advisor. The author may or may not be holding a position in companies that are being analyzed. More likely than not, the author will have an interest in the stock mentioned.

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