Zylog Systems

I would like the opinion of seniors and fellow boarders on this one. The Stock has crashed from mid 300s to under 100 in a manner of days/weeks. Is it time yet for the scavengers for a pound of flesh or is it akin to hitting yourself with an axe ?

The company has made a net profit of over 200cr last fiscal and is available at a market cap of around 340 cr and falling. Sales over 2300 cr, Div yield nearly 5%, p/e around 1.5

Cash Flow Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12

Operating Activity 28.27 10.06 -11.25 36.06 102.36 15.15 67.63

Investing Activity -33.10 -35.89 -66.56 -20.71 -163.95 -82.85 -97.32

Financing Activity 18.30 76.41 107.77 68.52 73.07 96.50 72.21

Net Cash Flow 13.47 50.58 29.96 83.88 11.49 28.80 42.51

Per jun 29, 2012 report of crisil

Valuations: Current market is aligned

We continue to use the discounted cash flow method to value Zylog. We have rolled forwardour projections by one year to FY14 to arrive at the fair value of Rs 344 per share (post split),revised from Rs 328 (Rs 656 pre split) earlier. At the CMP, the valuation grade is 3/5.

KEY FORECAST

(Rs mn) FY10 FY11 FY12# FY13E FY14E

Operating income 9,802 19,183 22,729 26,837 27,417

EBITDA 2,070 3,170 4,134 4,710 4,699

Adj Net income 1,028 1,453 1,983 2,355 2,306

Adj EPS-Rs 31.3 44.2 60.3 71.6 70.1

EPS growth (%) 21.0 41.3 36.5 18.8 (2.1)

Dividend Yield (%) 0.8 1.4 1.6 1.9 2.3

RoCE (%) 21.1 23.6 23.6 21.5 19.5

RoE (%) 19.3 22.6 24.2 22.8 18.6

PE (x) 10.3 7.3 5.3 4.5 4.6

P/BV (x) 1.8 1.5 1.1 0.9 0.8

EV/EBITDA (x) 5.8 4.1 3.9 3.3 2.9

Company is showing paper profits. AGM was on 25th Sept & they were suppose to pay dividend by 25th Oct,but was not paid.On enq with them ,i was told that they had informed their bankers on 25th,& bank is taking time,further there was bank holiday on 26th etc,so shareholders will receive by monday 5th Nov,now nobody is picking up phone & shareholders are waiting.Further till today more then 70 percent shares of promoters are pledged.I was never checking whether dividend declared by company is paid with in one week after AGM,or mgt wait till last day(one month frm AGM).This was good lesson.On checking last years records ,i found that even last year company paid div on last day.

hmm another satyam is it. I noticed the investor relations section on their website is pretty outdated. I wonder who their auditors are.

With Satyam, the books were cooked but the clients were real. So there will always be value to be found beyond a ridiculous price.

UTI holds over 5%, general insurance almost 3% and LIC over 3% here!!

Skumars nationwide has nearly 100% pledging now. I used to see buy reports with target of 45 when it was ruling at 30. It’s now 14 and few days back there was Karvy’s report initiating coverage on textiles and this had a target of 45!

Think before you enter. Dosen’t seems to have a good set of promoters, management, product/service, and good employee morals. Plus they haven’t paid salary for last month!!! I smell fish here.

thanks for updates from subhash nayak and hemant bhatia - i was considering this scrip

At the end of the day, Zylog is a decent midsized company with a flattish revenue profile (only in last quarter they have a 50% decline in bottom line, with flattish top line). Their DE ratio is just at 0.63. They just have some reckless promoter who seems to have gambled their share in the form of pledging, and weird finance is making the lender sell the share at dirt cheap rate.

Agreed that the falling of knife will continue for quite a long time. But the stock at a PE of 1 seems attractive to me.

I thought how can I invest in such falling knife stock. I though let me model a scenario where this stock is hitting the lower circuit everyday for next 40 trading session. And we invest just 1K per day in this stock. What will be the situation at the end of the 41th day.

Loss : 29K (57% of total capital) : Market price 9 : Average buying price 52.

PE = .18

P/B = .004

Divident yield = 51%.

From it seems it wont last for 40 days of LC. After sometime it will hit the UC. And one might get a good gain 1 year down the line or so (remember this is not a fraud company).

I though what would happen if someone increase his buying by a fixed percent on each fall. I checked that by such strategy (and with sufficient capital), one can actually reduce the average buying price.

Incr Loss %
0 51
5 43
10 32

SN Price Investment Count Total investment Total Count average price Loss % Actual Loss PE P/B Div Yield Earning Yield Total Yield
1 76.05 1000 13.15 1000 13.15 76.05 -0.01 0 1.38 0.3 6.57 72.5 79
2 72.25 1000 13.84 2000 26.99 74.10 2.50 50 1.31 0.29 6.92 76.3 83.2
3 68.64 1000 14.57 3000 41.56 72.18 4.91 147 1.25 0.27 7.28 80.3 87.6
4 65.20 1000 15.34 4000 56.90 70.30 7.25 290 1.18 0.26 7.66 84.5 92.2
5 61.94 1000 16.14 5000 73.04 68.45 9.51 476 1.12 0.24 8.07 89 97
6 58.85 1000 16.99 6000 90.04 66.64 11.70 702 1.07 0.23 8.49 93.6 102
7 55.90 1000 17.89 7000 107.92 64.86 13.81 967 1.01 0.22 8.94 98.6 108
8 53.11 1000 18.83 8000 126.75 63.12 15.85 1268 0.96 0.21 9.41 104 113
9 50.45 1000 19.82 9000 146.57 61.40 17.83 1605 0.92 0.20 9.9 109 119
10 47.93 1000 20.86 10000 167.44 59.72 19.75 1975 0.87 0.19 10.4 115 125
11 45.53 1000 21.96 11000 189.40 58.08 21.60 2376 0.83 0.18 11 121 132
12 43.26 1000 23.12 12000 212.52 56.47 23.39 2807 0.78 0.17 11.6 127 139
13 41.09 1000 24.33 13000 236.85 54.89 25.13 3267 0.75 0.16 12.2 134 146
14 39.04 1000 25.61 14000 262.46 53.34 26.81 3753 0.71 0.15 12.8 141 154
15 37.09 1000 26.96 15000 289.43 51.83 28.44 4266 0.67 0.15 13.5 149 162
16 35.23 1000 28.38 16000 317.81 50.34 30.02 4803 0.64 0.14 14.2 156 171
17 33.47 1000 29.88 17000 347.69 48.89 31.54 5362 0.61 0.13 14.9 165 180
18 31.80 1000 31.45 18000 379.13 47.48 33.02 5944 0.58 0.13 15.7 173 189
19 30.21 1000 33.10 19000 412.24 46.09 34.46 6547 0.55 0.12 16.5 182 199
20 28.70 1000 34.85 20000 447.08 44.73 35.85 7170 0.52 0.11 17.4 192 209
21 27.26 1000 36.68 21000 483.76 43.41 37.20 7811 0.49 0.11 18.3 202 220
22 25.90 1001 38.65 22001 522.41 42.11 38.50 8471 0.47 0.10 19.3 213 232
23 24.60 1002 40.72 23003 563.14 40.85 39.77 9147 0.45 0.10 20.3 224 244
24 23.37 1003 42.91 24006 606.05 39.61 40.99 9840 0.42 0.09 21.4 236 257
25 22.21 1004 45.21 25010 651.26 38.40 42.18 10548 0.40 0.09 22.5 248 271
26 21.10 1005 47.64 26015 698.90 37.22 43.33 11271 0.38 0.08 23.7 261 285
27 20.04 1006 50.20 27021 749.10 36.07 44.44 12009 0.36 0.08 24.9 275 300
28 19.04 1007 52.89 28028 801.99 34.95 45.52 12759 0.35 0.08 26.2 289 316
29 18.09 1008 55.73 29036 857.72 33.85 46.57 13523 0.33 0.07 27.6 305 332
30 17.18 1009 58.72 30045 916.45 32.78 47.59 14298 0.31 0.07 29.1 321 350
31 16.32 1010 61.87 31055 978.32 31.74 48.58 15086 0.30 0.06 30.6 338 368
32 15.51 1011 65.20 32066 1043.52 30.73 49.54 15884 0.28 0.06 32.2 355 388
33 14.73 1012 68.70 33078 1112.21 29.74 50.47 16693 0.27 0.06 33.9 374 408
34 14.00 1013 72.38 34091 1184.59 28.78 51.37 17512 0.25 0.06 35.7 394 429
35 13.30 1014 76.27 35105 1260.86 27.84 52.25 18341 0.24 0.05 37.6 414 452
36 12.63 1015 80.36 36120 1341.22 26.93 53.10 19180 0.23 0.05 39.6 436 476
37 12.00 1016 84.67 37136 1425.89 26.04 53.93 20027 0.22 0.05 41.6 459 501
38 11.40 1017 89.22 38153 1515.11 25.18 54.73 20882 0.21 0.04 43.8 483 527
39 10.83 1018 94.01 39171 1609.12 24.34 55.51 21746 0.20 0.04 46.1 509 555
40 10.29 1019 99.05 40190 1708.17 23.53 56.27 22617 0.19 0.04 48.6 536 584
41 9.77 1020 104.37 41210 1812.53 22.74 57.01 23495 0.18 0.04 51.1 564 615

Those who are interested in the spreadsheet for this calculation; They can get it at here

When company is unable to pay declared dividend (last date was 25th oct),how one calculate dividend yield ? I feel such investments doesn’t need any fundamental calculations (Just try their telephone no,nobody is there),for trading anything is fine.

Since the scrip opens and remains on lower circuit everyday, one might want to try to put in a daily ‘stoploss’ buy order slightly above the lower circuit if one really wants to take a chance.

Did anyone take a look at what the auditors had to say ( or mean) on their statement attached to the latest results?

I have not heard of a sebi inquiry so far. They are usually quick to smell a rat if there is one.

The company would be short of funds / salaries in such a scenario where promoter stands to lose his shirt for lack of funds.

The stock does seem to have volumes of 40-50K everyday inspite of the circuit.

http://www.stockfundoo.com/2012/11/modus-operandi-of-bear-cartels-zylog_15.html

Wild rumours and lower circuits happened in july on several stocks which had promoter pledging. Majority of those stocks havent really recovered. So it does not look that one would not get a buying opportunity here when it does start trading

now trading ! volumes of 80L shares on NSE alone in just over an hour

The only problem I see buying now is that you never know, whether the lender have done with their crazy selling spree, or they have decided to offload it in a smaller chunk for a very long time. So can’t decide on the lower level for this stock in short term.

I am not able to decide about its long term, because I haven’t analyzed the fate of such companies in long term.

Heard from MMB message-board pledged share of Zylog are being released from Aditya Birla Finance. Record breaking volumes of Zylog shares got traded on 20th Nov, from when it stopped the continuously hitting LC trend. From 20th it has started going up (with big volumes). Seems like some big guys are doing bottom fishing here, and hence all the pledged share selling are getting absorbed nicely.

I have taken a starter position at 82 for Zylog. Will add little bit more after 5-7% rise (max portfolio allocation at 3-4% for these kind of stocks). Hopefully I shall come out without any loss in a year or so.

Link to SEBI disclosure

My 2 cent on why to have 2% of your portfolio in Zylog System. (from my posting in MMB message board)

Think like as if you want to buy this business and how much money you want to pay for it (that will get rid of the irrational notion of promoter pledging and weird crazy selling by lender).

If i buy it now I need to pay 235 crore for the company. With a average qtrly profit of 30cr (10cr less than the average 40+cr). It will take me 2 yr to break-even. And If want to sell it after 2 year. I shall definitely get a PE of at least 4.5. So a plain 4 bagger in 2 yr, isn`t it a good proposition!!

The only reason of not putting a high percentage of portfolio to it is 2 fold. 1> you might get a better entry point, 2> you might incur an opportunity cost. So one can safely put 2% of portfolio in it, (and add .5% more on each 10-15% increase or 20-25% decrease in price) and forget for 2 year. If you loose all your money, you lose 2%, if you gain it will increase your overall portfolio gain by 7-8%. Seems a good deal to me.

Hitesh bhai/Seniors,

What is your thought on it?

Hi Subash, How are the promoters? Hyderabad company type people? Company bachegi? regards,

A 2% portfolio allocation on it’s way to a 4-bagger will boost your overall portfolio by a meagre 6% in 2 years. Better concentrate efforts whre meaningful positions can be taken/added.

Very often the best stocks to buy are the ones we already own.

Hi Excel,

Promoters are from Chennai. Folks like PN Vijay are used to be very bullish here a year back. Few links to understand the story here:-

http://www.zsl.com/in/sites/default/files/zsl-corp-overview.pdf

Hi Rudra,

Addition of 7-8% to your portfolio will take 2yr 50% gain to 57-58% gain, effectively 16% increase to your gain. Plus, I don’t expect the investor to seat silently, when the stock is going up and up. The assumption is that one will increase one’s holding as it goes up. So when the stock is at 4-bagger stage zylog might be at 8-10% of one’s portfolio.

I see zylog as a company-performance independent pure under-valuation case. The undervaluation of which is an end-product of faulty assumptions, and actions between promoters and lenders, and crazy selling of lenders of zylog security below rational price point. I feel sorry for both the lender and borrower.

Another way to look the same. Suppose at present, 3-4 companies bid to buy zylog system. My question is won’t the price paid per share be not at least 50%+ higher than current price? If yes, than what is the logic of not having zylog in one’s portfolio. And if no, why not?

Third way to look at the same. on 20th November 30Lacs zylog share got delivered (~10% of zylog MCap). That implies some big guys have started buying zylog share from the lender at 65 rs level. As we can think it as of distressed buy price of zylog share, at which big guys are finding real value for it. This clearly implies there is a good value in buying at these levels.

Thanks for your reply Subash. But PN Vijay does not prove the credibility. Thinking of Chennai pentasoft ana pentafour come to my mind. I am getting goosebumps.

This is a big fraud company. Please do a google search. Avoid.

Better add this to our thread of Corporate frauds.