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