Monday, December 24, 2012

Rash and Reckless acquisitions of Zylog ?

I will try to be brief with one example, because my incentives are inversely correlated to the amount of words I write. Less time to research and relax.

While Zylog continues to fall like a stone, optimists like me expectant of bloodletting stopping at or before 30 Rs levels. It started as a small trading bet which some of you may have squared off, but I decided to consider it as a long term investment.

It is amusing to eavesdrop on sheer imagination of chickenhearted opinions as well, some of it well meaning from survival instincts. While the scam is Proven against 300+ MPs in India, scam against Zylog isn't proven yet !, so let's take a chill pill.

Now for the cold calculated reasoning mind to take over.

Company has grown its consolidated revenues from 0.7 Crores to 2200 Crores between 1998 to 2012. PAT from 0.3 Crores to 205 Crores. (Please notice the decimals). Before we start pointing fingers on the un-accused and innocent-until-proved-guilty promoters, let us recall that company paid 112 Crores of income tax in 2012.

Let us analyse one acquisition, Brainhunter in 2010. I think it has been amazing acquisition for 35 Million $ in 2010. Let us look beyond the revenues of Brainhunter and its employee base. Brainhunter has 40+ employees and it was acquired from bankruptcy proceedings. It broke even next year itself made some profits in 2012. More importantly it gave Zylog a foot in the door at Canadian shores. 

Picture of the Canadian revenues renders as below for Zylog.

2009 Zylog Canada revenues 0
2010 Zylog Canada revenues 103 crores
2012 Zylog Canada revenues 810 crores

Besides being entrenched with its TalentFlow product (, which commands significant intellectual property and recurring licence fees in Canadian Government offices, company has been able to scale up services revenues along the periphery. One of the commendable policy that sets Zylog apart from other mediocre minds is their hands off approach towards subsidiaries and hiring and retaining talented people. Hiring John Mehrmann, for Canadian operations is one such example. Nothing wrong with a boutique consulting firm that lives in shadow of artist promoter who refuses to let go of paint brush but one needs to hire people more talented than oneself, should the desire to scale up has to see light of the day - company passes on this score colorfully. From nowhere to half billion dollar revenues in 14 short years - even though based on acquisitions commands respect. Not everyone makes money by inventing a bulb. Numerous companies thrive on acquisitions and turnarounds.

Canadian operations look delightful in mere two years of operations of the price paid (circa 150 crores).

Specialty products

Company have over six plus 100-200 crore product brands. This is based on my analysis of industry, alternatives, employees in division and Alexa rankings. 

Selling out a division which is profitable is a cinch with 1+ Trillion $ of dry powder waiting in wings, just in coffers of S&P 500. IT companies easily get sold at market cap of 2-5 times annual revenues and FMCG ones at 4-10 times revenues.  Although, there is no need to do that. They just need to hang around and manage the hiring and firing.
Company lives beyond humdrum existence of offshore development and maintenance. Each of products of company such as Field Power, Bank Companion, Silvanus 360 allows company to earn licence fees as Microsoft milks Windows OS. Company earns 17% of its revenues through licence fees of IP based software i.e.374 Crores out of 2200 Crores in Fy12. These product divisions of company can be sold at FMCG valuations i.e. 4-8X revenues.

Company has built proprietary products catering to niche segments which are becoming category leaders. I started analysing one such product for Waste Management which complies to WEEE and RoHS directives of EU, to guage market share of Silvanus 360 vs leader in this category. To my surprise, this product is the leader in its category. 

Cash Flow crisis

Shares pledged with banks have been sold, further accelerating downward spiral. All growth has been funded via acquisitions. Current position of the company is: 900 crore due from companies it renders services to. 1800 Crores will be paid as salaries this year. Cash flow crisis were to scare me if company had high fixed costs. Margins can be improved by letting go the loss and break even projects and increasing off-shoring mix.


I checked a number of other products in Waste management category which showed Alexa ranking in millions. From an outer space vantage point you can compare a business applications company with another business applications company.

Silvanus 360 alone ranks somewhere around RS Software, a 200 crore company, does as a whole

That is just one dimension of analysis. You need to estimate leadership position in an industry as well. Silvanus 360 is leader in Waste Management in EU whereas RS Software is a midget. 

Disc: 5-7% holding and in absence of any scam proven against the company over next 4 months will be comfortable to take up to 15-20%. I obviously expect multibagger returns in 2-2.5 years.