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Zylog Systems Ltd Management Discussions

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Jul 29, 2019|03:04:33 PM

Zylog Systems Ltd Share Price Management Discussions

IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINITIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THOSE DISCUSSED IN THE "MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE" AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENTS ANALYSIS ONLY AS OF THE DATE HEREOF.

Industry overview

Gartners forecast for worldwide dollar-valued IT spending growth in 2016 has been revised to a slight decline of negative 0.3%, down from last quarters fl at 0.0%. In constant-currency terms, the forecast was revised downward by 0.6%, which means currency movements have buoyed the market by 0.3%. Worldwide IT spending is forecast to grow 0.9% in 2016 on a constant-currency basis. However, currency rate changes will limit market growth to slightly negative, with 2016 at $3.4 trillion. By 2020, spending is forecast to approach $3.8 trillion in current dollars.

Indian IT industries overview

The domestic IT-BPO revenue is expected to post 10% growth to Rs 1.41 lakh crore in the ongoing fiscal and further grow by 11-13% (in Indian rupee terms) to achieve revenue of Rs 1.56-1.59 lakh crore in 2016-17.

The Indian IT-BPO industry has received over $7 billion (nearly Rs 47,467 crore) in Foreign Direct Investment (FDI), including $5 billion (nearly Rs 33,905 crore) in start-up investments, in current fiscal, industry body National Association of Software and Services Companies (Nasscom) said.

The industry is expected to add around 2 lakh jobs and is marching steadily to reach total revenue of $350 billion (nearly Rs 2,373.35 crore) by 2025 with digital revenues spearheading growth.

The company overview

The Company is an IT Service provider that offers differentiated services and is adept in delivering specific business technology solutions. The Companys strength lies in its innate ability to understand the requirements of its clients and to continuously build the competence and capability to provide integrated solutions and focuses on bringing about business impact for clients by maximizing returns from their investments in IT. The Company is a global services provider delivering technology-driven business solutions that meet the strategic objectives of its clients.

The Company is geographically spread with its subsidiaries/step down subsidiaries/ branches at US, British Virgin Islands, U.K., Singapore, Dubai and in India. The Company is 40th among the CRN Fast 100; North Americas fastest growing technology companies. This represents significant growth and continuous improvement from the already prestigious rank of 238 fastest growing technology companies in 2008, up from 275 in 2007, and up from 318 in 2006. The Companys Enterprise Mobile Applications Suite won Mobile Innovation Award from Research in Motion (RIM) and New Jersey Technology Council (NJTC) in June 2011. The Company offers a broad range of services and solutions providing added value across multiple domains.

A. ANALYSIS OF CONSOLIDATED FINANCIAL PERFORMANCE

The financial statements have been prepared in compliance with the requirement of Companies Act 1956, guidelines issued by Securities and Exchange Board of India (SEBI) and Generally Accepted Accounting Principles (GAAP) in India. The management of Zylog Systems Limited accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to financial statements have been made on prudent and reasonable basis, in order that the financial statements refl ect in true and fair manner the form and substance of transaction, and reasonably present the companys state of affairs and profit for the year.

1. Shareholders funds

The paid up share capital of the company is Rs. 2949.64 lakhs. During the year, the company has not transferred any amount to general reserve as there as been a loss of Rs. 19,504.52 lakhs for the year. The book value of the tangible and intangible assets amounting to Rs. 28632.68 lakhs were transferred to Reserves and Surplus account based on the used lives of the assets as per the Schedule II of the Companies Act, 2013. And an amount of Rs. 39,053.46 also has been transferred to reserves net loss due to the closure of one of the branches in the USA. The balance in reserves and surplus account including the share premium account has further decreased to Rs. (95,291.23) lakhs as at 31st March 2016 from Rs. (18,133.25) lakhs as at 31st March 2015.

The total numberof shareholders as at March 31, 2016 is 32,832 and the shares held by the promoters 2.81%, Body Corporates 11.86%, Foreign Corporate Bodies 8.66%, Foreign Institutional Investors 4.21%, Individuals 65.68% and other 6.78%.

2. Loan borrowings

Secured loans as at the financial year ended 31st March, 2016 is Rs. 101,403.92 lakhs as against Rs. 93,165.39 lakhs as at the previous year ended 31st March, 2015.

The entire borrowings of the company, except the hire purchase loans of the parent company, have been classified as Non Performance Assets and are payable on demand. Hence, except the hire purchase loans, entire secured loans were classified under short term borrowings. The increase in the loan borrowings is due to reclassification of other liabilities.

Break-up of the loan borrowings as of 31st March 2016 and 2015 are detailed below:

Rs in lakhs

Loan particulars of parent company 2016 2015
Working capital loan 17,483.14 17,097.93
Term loan 22,270.86 23,691.58
Working capital term loan 31,617.29 31,496.51
Hire purchase loans 3,059.94 532.71
Unsecured loans 15,863.07 9,488.19
Total 90,294.30 82,306.92

Rs in lakhs

Loan particulars of subsidiary companies 2016 2015
Working capital loan 3,227.47 3,227.47
Term loan 9,831.11 9,831.11
Working capital term loan - -
Hire purchase loans - -
Unsecured loans 8.79 -
Total 13,067.57 13,058.58

3. Other current liabilities

Other current liabilities include the interest accrued on borrowings, statutory dues payable, unpaid dividend, payables to employees and vendors. Break-up of the other current liabilities is given below:

Rs in lakhs

Particulars 2016 2015
Current maturities of the borrowings - 10,125.13
Interest accrued on borrowings 2,683.52 9,451.69
Statutory dues payable 1,910.80 2,270.84
Unpaid dividend 1,407.46 1,407.39
Provision for expenses 174.09 1,828.54
Payable to employees/vendors 2,118.71 8,038.39
Others 35.87 532.34
Total 8,330.45 33,654.32

4. Fixed assets

Net Block of tangible assets is given hereunder:

Rs in lakhs

Fixed assets particulars 2016 2015
Land & building 1,775.05 2,324.04
Plant & machinery 133.14 4778.41
Computer equipment 1,870.94 12,339.27
Furniture & fittings 83.15 91.36
Interior decoration 37.16 191.46
Electrical fittings 95.56 180.26
Office equipment 61.22 210.10
Vehicles 29.45 90.17
Leased assets – Computer equipment 31.10 848.74
Total tangible assets 4,116.77 21,053.81

Net Block of intangible assets is given hereunder:

Rs in lakhs

Fixed assets particulars 2016 2015
Business acquisition - 9,211.13
Computer software 8.95 21.39
Product development cost 417.84 11,523.35
Total tangible assets 426.79 20,755.87

There is an addition of Rs. 104.87 lakhs in tangible assets and Rs. 159.04 lakhs in intangible assets. An amount of Rs. 14,098.93 lakhs and Rs. 14,533.75 have been transferred to the Reserves and Surplus account from the tangible and intangible assets respectively based on their used lives as per the guidelines of Schedule II of the Companies Act, 2013.

5. Investments

Investments primarily consist of the investments made by Zylog Systems Asia PteLtd, the wholly owned subsidiary in Singapore based Malaysian listed company Nova MSC Sdn in the year 2009-10. Total investment made as of 31st March 2016 is Rs. 1,404.60 lakhs. The investments made in the wholly owned subsidiaries in Zylog Systems (Canada) Limited and Matrix Primus Partners Inc amounting to Rs. 1,949.22 lakhs and Rs. 451.99 lakhs respectively shown in the previous year have been written off by the previous management during the half year ended 30th Sept 2015. As per the reasons explained by the previous management, The shares of the Canadian subsidiary Zylog Systems (Canada) Limited which was pledged with ICICI Bank as collateral securities for the loan availed from them, have since been sold by the bank due to the default in loan repayment and interest payment, the bank has sold the assets pledged with them and hence the investment made in the subsidiary has been written off during the year.

The investment made in the American Subsidiary M/s Matrix Primus Partners have been written off by the previous management during the half-year ended 30th September 2015. As per the explanations given by the previous management, the subsidiary company Matrix Primus Partners Inc has lost its entire business and employees and the company is virtually closed. Hence, the investment made in this subsidiary has also been written off.

6. Trade receivables

Trade receivables net of provision for doubtful debts amounting to Rs. 6,603.14 lakhs for the year ended 31st March 2016 as compared to Rs. 16,563.85 lakhs as at 31st March 2015. Debtors, which were unrealized for more than 3 years, have been written off as bad loans in the US branch books by the previous management for the half-year ended 30th Sept 2015. The remaining receivables are considered good and realizable.

7. Cash and cash equivalents

The cash and bank balance as of 31st March 2016 is Rs. 2,360.47 lakhs as compared to the previous year balance of Rs. 2,712.26 lakhs. Brief details of the cash and bank balances are given in the below table.

Rs in lakhs

2016 2015
Cash on hand 8.65 12.69
Bank balances 1,627.66 1,890.92
Fixed deposits 529.37 524.65
Lien with banks 173.99 262.05
Unclaimed dividend amount 20.80 21.95
Total 2,360.47 2,712.26

8. Short term loans and advances

Short term loans and advances comprises of the advances paid to the wholly owned subsidiaries, prepaid expenses, advance taxes paid and the advance amounts paid against the GDR funds in the previous year.

The brief break-up of the short term loans and advances is provided below:

Rs in lakhs

2016 2015
Security deposit - 2.11
Other deposits 80.12 36.34
Advance to subsidiary companies - 7,337.48
Prepaid expenses 88.29 2,161.61
Advance tax and withholding taxes (Net of provisions) -628.14 1,007.90
Other advances 565.40 23,619.78

The parent company paid trade advance to its wholly owned subsidiaries Zylog Systems (Canada) Limited and Matrix Primus Partners Inc. However During the half-year ended 30thSeptember 2015, the previous management of the company has written off the outstanding amount Rs. 7,337.48 lakhs. During the same time The Company also has charged off the prepaid expenses booked in the earlier year. Other advance in the previous year comprise of the advances paid to various parties from the funds raised from GDR issued in the year 2013-14.

9. Other current assets

Unbilled revenue booked in the previous year has been reversed during the half-year ended 30th September 2015 by the previous management to the extent of Rs. 6,964.12 lakhs.

C. RESULTS OF OPERATION

Summary of financial results for the year ended March, 2016 and 2015 is as follows:

Rs in lakhs

2016 2015
Income from software services & solutions 22,880.02 41,101.34
Software development expenses 16,657.41 33,612.68
Gross profit 6,222.61 7,488.66
Selling & general administrative expenses 6,270.16 8,253.42
Operating profit (EBIDTA) (47.55) (764.76)
Interest 49.83 1,556.41
Depreciation 1,655.73 17,407.20
Operating profit after interest & depreciation (1,753.11) (19,728.37)
Other income 301.39 2,103.32
Prior period adjustments 20,660.84 47,000.54
Profit before tax (22,112.56) (64,625.59)
Provision for taxes (2,608.04) (892.25)
Profit after tax (19,504.52) (63,729.34)

1. Income

Income from software services & products.

Rs in lakhs

2016 2015
Export of software services, products & solutions 19,218.00 38,167.87
Domestic operations 3,662.02 2,933.50
Total 22,880.02 41,101.37

The companys revenue is generated principally from software services on fixed cost, time and material and products & solutions. Revenue from software services on fixed cost contracts is recognized as per the proportionate completion method or milestones reached.

On time and material contracts, revenue is recognized as the related services are rendered. Products & solutions segment covers the license fee for the particular customized solutions provided together with the necessary integration work carried out. This segment carries better margin on account of the level of innovation, design work and customization etc. Annual technical services revenue and revenue from fixed cost maintenance contracts are recognized on completion of the services.

The revenue from domestic revenue is mainly from e-governance and services rendered to the banks in India.

2. Expenditure

d. Employee cost

Rs in lakhs

2016 2015
Salaries and incentives 4,031.19 14,477.65
Employees benefits 219.60 82.15
Project expenses 12,336.82 18,642.94
Staff welfare expenses 69.80 409.93
Total 16,657.41 33,612.68

Employee cost consists of salaries, bonus/incentives, employee benefits incurred for employees, software professionals engaged in and offshore projects. Project cost includes all other direct expense relating to the projects like travel expenses, software packages & tools procured for meeting the needs of software development. During the year the company incurred 72.80% on the operating revenue as compared to 81.77% during the previous year. During the year the gross profit was Rs. 6,222.61 lakhs representing 27.2% of the revenue as compared to Rs. 7,494.69 lakhs representing 18.2% of the revenue in the previous year. The new management took over in Nov ‘ 15 after the erstwhile promoters were removed by the shareholders has taken several initiatives to recover the company from the present disaster which have started yielding some results and the full effect of them will be seen in the coming years. e. Selling and General Administrative expenses

Rs in lakhs

2016 2015
Consultancy charges 615.99 300.48
Consumables 991.52 1,212,.56
Rent 209.13 181.11
Administrative expenses 567.78 490.68
Insurance 1.79 1,208.95
Travelling expenses 230.04 99.05
Communication expenses 108.19 261.78

 

2016 2015
Audit fee 33.65 87.19
Recruitment & visa related expenses 250.57 572.63
Provision for diminution value in investments 1,949.22 -
Impairment/discorded assets written off - 1,944.80
Legal and professional charges 199.63 85.67
Marketing expenses 1,067.28 1,695.91
Others 45.37 112.63
Total 6,270.16 8,253.44

The total selling and general administrative expenses are 27.4% of the revenue as compared to 19.1% during the previous year. Normally, the selling and administrative expenses are considered as indirect expenses and will not be in proportion to the revenue increase or decrease. Considering this fact, the selling and administrative expenses in real terms have been brought down by 24% from the previous year amount. Except the consultancy charges, travelling expenses and legal and professional charges, other expenses are either in line with previous years fi gures or decreased. The increase in the said expense heads is due to the present conditions of the company.

3. Taxes

Your company does not enjoy any tax benefi ts extended to the software companies by the Government of India. Hence, the entire revenue generated by the parent and subsidiary companies in India is taxable as per the provisions of the income tax department. We pay taxes in all our places of operations except in Dubai, on the income that is sourced in those countries. For these reasons, the tax provision for the year ended Mar 31, 2016 has been estimated at Rs. (2,608.04) lakhs as against Rs. (896.25) lakhs in the previous year ended 31st March 2015. The deferred tax income Rs. 2,953.60 generated out of various factors, mainly on account of depreciation has contributed to the total tax asset of Rs. 2,608.04 lakhs.

The details of tax are given below:

Rs in lakhs

2016 2015
Current tax 394.72 218.89
Tax relating to previous years (49.16) -
Deferred tax (2,953.60) (1,115.14)
Total (2,608.04) (896.25)

4. Net profit

The net loss amounted to Rs. 19,504.52 lakhs and Rs. 63,729.34 lakhs for the years ended 31st March 2016 and 2015 respectively. This represents (84.1%) and (147.5%) of the total revenue of the respective years. The net loss is mainly on account of the write off receivables relating to the prior period and the provision for diminution value in investments made during the year. Your company should be able to turnaround the losses to profits in the coming year.

OUR STRENGTHS

Your companys strength lies in the practices that it has been following in both business and technology for more than a decade. To name a few, Solution based customer approach, Diversified growth opportunities, Global Delivery Model, Committed to Quality and process execution, etc. Our presence in US, Asia Pacific, Middle East and Europe regions add further strength to the above. As discussed elsewhere in the report, employees are the core strength of the company; their dedication, commitment to their work and the confidence they posed in the company will help the company to tide over the present challenges as it helped in the pass to pass over many challenges in the past.

OUR STRATEGY

We seek to consolidate our present position and scale up gradually. The company is in the process of creatingverticalisationof the business practices and thereby creating healthier competition within the organization amongst the business heads. The company will continue to invest in infrastructure and employees after consolidating its present position.

COMPETITION

The IT service market is highly competitive. Your company has to compete with the bigger consulting firms, sub-divisions of multinational technology firms, Indian outsourcing firms and in-house IT departments of large corporations.

We believe that the principal competitive factors in our business include the ability to: I) Differentiate the offerings from other competitors II) Effectively integrate onsite and offshore execution capabilities III) Increase service offerings to provide one stop solutions IV) Attract and retain high quality technology professionals

We believe we compete favorably in these factors.

Invest wise with Expert advice

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