Sell Zylog Systems: Reliance Money

Reliance Money is bearish on Zylog Systems and has a recommended sell rating on the stock, in its February 13, 2009 report. “For Q3FY09, Zylog Systems reported 8.6% growth in the consolidated revenues to Rs 1954.7 million, In USD term revenues were lower by 9.5% sequentially to $38 million, billing rate declined by 5% in Onsite and 2% in offshore. EBITDA margins for the quarter collapsed by 620bps to 10.7%, on the back of a Rs 40 mn write off on account of bad debtors (Satyam-Rs 6 mn and Rs 34 million from Cover Point , UK),which took SG&A cost higher by 29 bps qoq to Rs 393.9 mn. Interest cost for the quarter increased by 38% qoq to Rs 13.7 mn (Incremental Debt of Rs 200 mn term loan and Rs 300 mn WC loan (not yet used). Net profit for the quarter was down by 19% sequentially and 8% yoy to Rs 215.2 mn.”

“We believe, forward trading multiples are getting irrelevant for ZSL, at CMP of Rs 79, stock trades at around 1.4x FY09E and 1.7x FY10E and after the Satyam’s fiasco market is hardly giving any value to company’s cash balance (net cash balance of Rs 900 mn at the end of Q3FY09) On the other hand, we believe for companies like ZSL (80% onsite exposure) it is going to be more difficult to ride the storm in a difficult industry environment, where clients are asking for more offshoring as a cost cutting measure. Going forward, we do not see any fresh trigger for ZSL till the time some concrete improvement happens at the industry as well as at the company level ( higher offshore), thus we recommend investors to exit from ZSL at the current level, as we believe there could be another 15% downside from current level.” says Reliance Money’s research report.

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