Zenith Infotech

`Going For 'The Zenith' 

After the successful invasion of the primary market by a number of new software

companies, those associated with the existing listed companies are now tapping the

capital market to raise funds. The valuation of software companies seems to improve

every day, which in turn creates a positive impact on the IPOs.

HCL Technologies from the HCL group successfully closed its book-building issue for a

massive Rs 742 crore. Closely following HCL Technologies is Zenith Infotech–an

associate company of Mumbai-based Zenith Computers. Zenith Computers has

achieved a remarkable position in the PC hardware segment given the intensity of the

competition posed by MNC brands. Zenith Infotech, with a strong focus on emerging

areas such as ecommerce and web-based technologies, expects to create a place for

itself in the growing population of software companies in the stock market.

The company closed the year ended March 1999 with a turnover of Rs 11.55 crore and

a net profit of Rs 2.43 crore.

Background: Experienced player



Zenith Infotech was formed in September 1996 as Zenith Networks. It changed its
name to Zenith Infotech in December 1996. The company is promoted by Rajkumar

Saraf, a graduate in commerce and law. Saraf started his career by forming an

electronics trading company and set up Zenith Computers, a company engaged in

manufacture of PCs, servers, LANs and computer peripherals, in 1980. Zenith

Computers is a Rs 200 crore company and is listed on The Stock Exchange, Mumbai.

It is currently traded at Rs 90, discounting the projected P/E by 13 times its

annualized March 2000 earnings.

Zenith Infotech was formed to provide network integration services and entered the

software business in December 1997.

Operations: Based on products



Zenith is engaged in software product development, solutions and network integration
services. The company is focused on providing services in the area of ecommerce and

web technology, client-server re-engineering, database, and middleware technology. It

has created expertise in the banking and finance segment and has developed a

product–SuperBanker. Apart from this, the company has also developed a data

synchronization and transport product–ZenSync– and an extranet product for

associations and chambers of commerce–Net.Council.com.

SuperBanker has been installed in more than 250 branches of various banks. Zenith is

also engaged in software services, which it executes through its offshore development

center in Mumbai. It has branded its services as ‘Net.Enterprise’ and has also

introduced a sub-brand ‘Net.Enterprise.Global’ to cater to its high-volume

international clientele. The company achieved a turnover of Rs 11.15 crore from its

products division in the year ended March 1999 compared to Rs 9.55 crore for the

previous year.

Apart from its 6,000 sq ft facility in Andheri, Mumbai, the company has a subsidiary in

Singapore called Zensoft Technologies and offices in the US. Its operations in the US

are expected to commence in March 2000. The company’s clients include

Development Bank of Singapore, JP Morgan, Compaq, Sony and Oracle among

others. Zenith also plans to set up an office-cum-global development center in the UK

at Manchester or London. The company also plans to set up an office-cum-onsite

development center in Dubai.

Project: Massive expansion

Zenith has plans to expand its activities at a total cost of Rs 45 crore. The company

plans to setup a new software development center either at CIDCO or at the Millenium

Park in New Mumbai. The company is yet to identify the exact location for setting up

its own infrastructure. The new offshore development center will have a capacity of

more than 650 employees and will be set up at a cost of Rs 20.21 crore. Apart from its

investment in India, the company plans to invest in offices abroad. It plans to spend

about Rs 9 crore to set up offices in California, Dubai and Australia. Out of the total

cost, Rs 6.50 crore will be met through the current issue. The balance expenditure of

Rs 2.50 crore will be met through internal accruals in 2000. The company has

estimated Rs 4.50 crore as marketing expenses whereas working capital requirement,

and issue and other expenses including contingencies are estimated at Rs 13.85

crore.

Zenith is coming out with a Rs 39.12 crore public issue of 3,475,000 equity shares.

Out of the total issue, 600,000 equity shares of Rs 10 each are reserved for preferential

allotment to various FIIs, mutual funds, banks, and friends and relatives of promoters at

a premium of Rs 115 per share. The balance of 2,875,000 is offered to the public at a

premium of Rs 100 per share. The equity shares are proposed to be listed on The

Stock Exchange, Mumbai and the National Stock Exchange of India, Mumbai.

The company’s post-issue equity will be Rs 11.50 crore, out of which the promoters
will hold 68%. FIIs and mutual funds will hold 5%, the public will hold 25% and the

balance will be offered to employees as ESOP. The company’s equity stood at Rs

1.85 crore in March 1999. This increased to 5.25 crore in October 1999 after receipt of

call money of shares allotted to promoters at par in August 1998 and March 1999. The

equity further increased to Rs 7.88 after the issue of bonus shares in the ratio 1:2.

Future: Focus on web



Zenith is now in the process of segregating its operations into different strategic
business units (SBUs)–Banking and Financial Software; Ecommerce and Web

Technology; Database, Messaging and Middleware; Network Software and Integration.

It has Embedded and Information Appliance Software. Under the banking segment, the

company has already developed a banking product with successful installation. It has

plans for two new products in internet banking and centralized MIS software for head

office and zonal office reporting. The company plans to be a dominant player in the

banking segment. The focus of the banking industry is increasingly shifting to

customer care inevitably leading to computerization. This segment provides a good

opportunity for the company. It already has an impressive client base and plans to

focus on the mid-end banks.

Zenith will however be more aggressive on the ecommerce and web technology front,

which it expects, will contribute almost 40% of the total turnover in the future. The

company plans to focus on ecommerce and maintenance of web infrastructure. The

company has developed a product called ZenSync under its SBU–Database,

Messaging and Middleware. It also plans to offer services on client-server engineering,

software component integration, and implementation of high-end transaction

processing and database replication solutions. This SBU will be aligned with the

ecommerce SBU. The networking and embedded software SBUs will be engaged in

their related activities.

To offer these services, Zenith plans a major increase in the number of software

professionals. The  aggregate strength of its software professionals in India is slated to

increase from the current 75 to 650 by March 2003. The company also plans to go for

SEI CMM assessment in the next 8-12 months. Zenith has tie-ups with Microsoft and

Novell, and proposes to tie up with Computer Associates. For its product ZenSync, the

company is negotiating tie-ups and technology licensing programs with various

software and consulting companies in the US. Apart from this, it plans to build an

extensive base of product resellers, consultants and technology licensing partners over

the next one year. It also plans to develop relationships with large system integrators

as a technology resource supplier.

Financial performance: Impressive



Zenith Infotech reported decent performance for the year ended March 1999. However,
the performance of the company in the first half was excellent. The company also

reported a turnover of Rs 11 crore for the year ended March 1999 compared to Rs 9.55

crore the previous year. Its net profit however jumped

 392% over the previous year to

close at Rs 2.43 crore. This was due to the improvement in operating margins–from

6% to 24%. In the first half ended September 1999, the company has reported net

profit of Rs 3.14 crore on a turnover of Rs 7.53 crore. The profit includes Rs 51.40 lakh

received as dividend from Zenith’s Singapore subsidiary. The operating margin stood

at 41% in the first half.

Zenith expects to close the current financial year with a turnover of Rs 19.75 crore and

a net profit of Rs 7.22 crore. This translates into a growth of 92% and 198%,

respectively. It expects to earn a dividend of Rs 1.40 crore from the Singapore

subsidiary. The estimates are based on the first half performance and the expected

revenues from additional staff.

Investment potential: Riding the IPO boom



Zenith is offering shares at Rs 110, which discounts the projected March 2000
earnings by 17.5. While the size of the company is quite small in relation to the offer

price of Rs 110, it is charging premium on the basis of its exposure on the emerging

web-based applications. The company has achieved excellent turnover in the first half

of the current year and hopes to replicate the performance in the year ended March

2000. On the downside, the company is yet to acquire land for the expansion of its

operations. This may hamper its growth rate in the next financial year.

Shares of new companies are being listed at substantial premium to the offer price.

Recent examples are Hughes Software, Kale Consultants and Compucomp. With the

listed companies trading at mind-boggling price to earnings ratios, the interest in IPOs

is obvious. HCL Technologies, which offered shares through book building at a price

range of Rs 500-580 per share, received an overwhelming response. Considering this

and the business of the company, investors should expect an appreciation of atleast

100%. In the longer term, the movement of the share price will depend on the ability of

the company to gear up its infrastructure facility to sustain the growth. Subscribe.

The views reflected here are not of this publication. No liability is accepted for

losses based on the information presented here.

Sushanto Mitra



is a financial consultant with Techcap Consultants India