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Zenith to merge hardware and software businesses

Zenith Computers is planning to merge its two software companies, Bombay-based Zenith Infotech and Singapore-based Zensoft, with the parent company.

T O D A Y

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The will allow Zenith to get re-rated as a techno-software company along the lines of HCL Infosystems and Wipro.

"We are examining the possibility of integrating our hardware business with our software operations," Zenith Computers Managing Director Raj Saraj said.

The purpose of the proposed merger, analysts say, is to project a healthier bottom line and a better appreciation of share price.

By being a hardware company, Zenith's profit margins are low. But through integration, it can combine the strengths of "high margins" from the software business with the "large volumes" from the hardware activity.

Zenith Computers posted a meager net profit of Rs 27.5 million on a turnover of Rs 1.76 billion for the year ended March 1998 while Zenith Infotech's net profit stood at a high of Rs 15 million on a turnover of Rs 80 million.

Analysts say the proposed merger will enable the company to have better bargaining strength if it decides to privately place shares with foreign institutional investors for software expansion.

Also, in case of a public issue, the company may be able to command premium.

Saraf, however, rules out the possibility of coming out with a public issue. "I don't want to dilute my stake in the company," he said.

Saraf holds 65 per cent stake in Zenith Computers while Unit Trust of India holds 8 per cent. Saraf is also examining a second route: the merger of the two software companies, where he holds total stake, before he decides to come out with an initial public offering.

This may enable him to command a premium in line with the other software companies.

But, analysts feel, he will not be able to raise a substantial amount of funds for his expansion needs if he takes this route.

The turnover of Zenith Infotech and Zensoft is expected to touch Rs 100 million each, Saraf said. Company sources say the merger is the most likely possibility.

For the year ending March 1999, Zenith Computers is expected to notch a turnover of Rs 2 billion with a profit after tax of Rs 45 million.

"I don't see the PAT going higher than that. Computer hardware companies operate on tight margins," an analyst said.

Which is why Saraf is considering a merger. With the integration of hardware with software business, the company could get a re-rating.

Zenith Computers has improved its market share this fiscal from 7 to 10.3 per cent and ranks second in terms of units sold.

According to Saraf, aggressive pricing allowed the company to take away share from branded computer companies and grey operators. "Our margins are also higher this year as we made innovative value additions in Internet options," he claimed.

For its Internet PC buyers, Zenith offered 100 hours of free Internet time.

- Compiled from the Indian media

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