Platinum available at the price of Silver

What would you say when I tell you that there is a company which has managed to grow it's topline by over 85% in the last 2 years, it's EBITDA has grown by 130% and it's Net Profit has posted a growth of over 125% during the same period. This is not all. The superb growth record is just one part of the story. The best part is that, this company is still available at peanut valuations. It is currently trading at just about 3 times it's Trailing-Twelve-Months EPS and at less half of it's book value. But there is a catch: This company has a very small Equity Capital and most of it is being held by Long Term Investors (including Promoters). Hence there is very small trading volume in it's stock on the exchanges and one large order can suddenly create big movements in it's stock price. Hence it is a company purely for Long Term Investors, who can gradually accumulate it's shares over a period of time and then wait patiently for the market to give it it's due fair value.

The company that I am talking about here is Zicom Electronic Security Systems Ltd. The promoters of Zicom are 1st Generation Entrepreneurs, not coming from wealthy families. That is why they had to look for outside funding at a very early stage of the company's growth. During every subsequent Equity issuance since it's listing in 1996, the Promoter stake was getting diluted to some extent. That is the reason why the promoter holding in the company was very low at just 18.36% by 2010. Since then the Promoter group has tried to gradually increase it's stake. First they bought from the Open market & increased their stake to 20.76%. In the previous fiscal, Zicom raised fresh capital via preferential allotment of shares to the Promoter group and to one Singapore based PE Fund. The PE Fund took little over 17% in Zicom, while the Promoters managed to push their holding to 21.40%.

Coming back to Zicom's financial performance, it continues to post strong Y-o-Y double-digit growth. As of Sept'13, Zicom's T-T-M Total Income has reached the level of Rs.795 crores. Two years back it was at Rs.427 crores. During these 2 years, Zicom improved business mix of higher contribution from overseas ventures, has helped improve it's EBITDA margins from 10.13% to 12.53%. The near tripling of Interest Cost & more than Quadrupling of Tax outgo limited the improvement in Net Profit margin to just about 85 basis points to reach a figure of 4.62%.

As you can see, Zicom's T-T-M Total Income & EBITDA have grown at an excellent pace over the last 8 quarters. The EPS did see a drop in between, but it was mainly because of expansion of Equity Capital of the company. After that, the EPS has grown at a faster pace. As of Sept'13, Zicom's 12-months EPS stands at Rs.21.50/-. That means at the current share price of about Rs.65/-, Zicom is valued at just about 3 times it's EPS. Isn't this the most attractive valuation one can find for such a wonderful performance track record??!! Zicom's book value stands at over Rs.150/-. It's share price will eventually get to it's fair value as it cannot remain highly undervalued permanently. The only condition being that Zicom should continue with a decent financial performance in the coming quarters as well.

From less than Rs.30 levels in December'2011, Zicom's share price went on to hit a high of Rs.100 level in December'2012. From there it corrected to about Rs.45 over the following nine months. And now it has started moving up again. This time I am expecting it to make a new high, much higher than the previous high of Rs.100/-. But please remember that in the meanwhile, the stock could test the investor's patience as nobody can predict the timeline precisely for a stock to achieve certain level. I will recommend gradual purchase of Zicom shares, few shares everyday, spread over several weeks. Any large order could create large movement in share price as the trading liquidity of this stock is very low. Just buy it in the price range of anything upto Rs.100/- and wait patiently. While waiting, please remember to monitor the company's business performance on a quarterly or half-yearly basis. If it continues to remain healthy, then you are sure earn multibagger returns on your investment in this company over the coming couple of years.

Happy Investing !!!

TTML - Clean-up over, Going for Growth

Tata Teleservices (M) Ltd. had won 3G spectrum for Rest of Maharashtra (RoM) circle in the auction held in 2010. TTML was also the first operator to launch 3G services in select locations in November'2010. But surprisingly TTML did not expand it's 3G coverage beyond some 12 to 15 cities & towns in the state since June'2011. At that point of time, TTML had a wireless subscriber base of 10.51 million in RoM circle, but only 5.1 million of those were active on the network as per VLR records. That means, a little over 50% of TTML's RoM subscribers were useless to the company & were unnecessarily adding costs.

TTML immediately started deleting such inactive subscribers as well as those who were generating very low unsustainable revenues. Within a year, i.e. by June'2012, TTML's wireless base in RoM circle was down to 8.17 million, while the active base had improved to 5.46 million (67% active). TTML did not stop there & has continued this clean up act every month. As per the latest data available for September'2013, TTML's wireless base is down to just 6.07 million in RoM circle, while it's VLR active base is at 4.87 million (80% active). TTML's clean-up act was not restricted to just the RoM circle, even it's Mumbai subscriber base dropped from 6.17 million in June'2011 to just 3.42 million in Sept'2013, while it's VLR base has remained steady from 2.28 million (37% active) to 2.38 million (70% active). The following chart shows the combined effect of both the circles clean-up:

The combined VLR base for TTML now stands at 7.21 million, 76% of the company's total subscriber base. This is a healthy figure & the company will now look forward to strengthening this by improving it's Network Coverage, which will improve user experience & encourage more of it's subscribers to continue with it's services. TTML has already started on this path. In the first two quarters of the current fiscal, TTML has added some 1500 new Base stations across the RoM circle. And aims to add another 600 Base stations in the coming months. This network expansion has helped improve it's 2G coverage in more villages & highways as well as it's 3G coverage in many more cities and towns. TTML's 3G coverage has expanded from just about 15 locations at the end of March'2013 to 108 locations by September'2013. All big cities & major highways in RoM have been covered. But still many of the large towns are yet to be covered by Tata DoCoMo's 3G network. I am hoping that most of them will get it by the end of this fiscal. The company had boosted it's coverage in Mumbai circle in the previous fiscal.

There are some advantages & disadvantages of this late expansion of 3G network. Major advantages are lower equipment costs & more time for better planning in network rollout. India is experiencing a terrific growth in Smartphone usage. This is going to boost usage of mobile internet services. Many Smartphone users may initially start with 2G services, but will eventually upgrade to 3G. The cost differential between 2G & 3G internet services is reducing as operators are hiking prices of 2G data plans. It makes sense for the operators to eventually make 3G data plans cheaper than 2G ones because the customer will use lot more data on 3G in less time because of the speed advantage. So it costs the operator much less to enable a customer use something like 5GB data usage on it's 3G network than it's 2G network as the customer will be using just about one-tenth of the network time on 3G compared to 2G. That means the operating cost is lower on 3G. I am not expecting prices of 3G data plans coming down, but operators could increase data usage limits on existing plans.

TTML's stock price has been on a downtrend since July'2011, when it had peaked around the Rs.20 level. Since then it has made lower tops & lower bottoms and it's 200-days moving average (DMA) has acted as a strong resistance throughout this period. Right now TTML's share price is close to the Rs.7.50 level and is making another attempt to go above the 200-DMA. If it manages to get past & stay above the 200-DMA for atleast a week or so and then get past it's previous high of about Rs.9.20/-, then we can safely say that the stock has reversed it's trend. I am optimistic that TTML's share price will get into a gradual uptrend this time. The company's upcoming Q3 & Q4 results should also be positive as they will start reflecting the company's network expansion efforts. In the month of Sept'2013 alone, TTML's VLR base has jumped by 1.63 lakh, the biggest jump since June'2012. The coming months should also show a positive development on this front.

It is difficult to set a target price for TTML. There could be lots of developments in store for the company as well as the Telecom sector in general. The most eagerly awaited M&A guidelines for this sector are just around the corner. Once there is clarity on that front, we will see some solid action by some of the operators. TTML & TTSL could be in the middle of some hectic M&A activity. All that should ultimately be positive for the company & it's shareholders. But there is one threat to the company as well: Reliance Jio's 4G launch. The network coverage & pricing of it's services and availability of devices will decide how much market share all other operators will lose to Reliance Jio. Since TTML derives over a third of it's revenues from Wireless Data business, it could be one major victim of Reliance Jio. But then none of these 3G competitors are going to sit idle. If Reliance Jio does come out with aggressive pricing, most of these 3G players will try & match that. It will be an interesting war & we the consumers will be the ultimate beneficiary.

Suzlon Energy's progress till Q2-FY'14.

Frankly, Suzlon Energy's Q2 FY'14 numbers did disappoint me a little bit. But still, it is a positive indicator compared to Q1, when Suzlon had posted Consolidated revenues of about Rs.3900 crores, the lowest figure in 9 quarters. Suzlon's EBITDA loss was at Rs.291 crores in Q1. For Q2, Suzlon has posted a 23% Q-o-Q jump in Consolidated revenues to about Rs.4800 crores and an negligible EBITDA loss of less than Rs.20 crores. Suzlon's cost reduction efforts seem to be showing it's effect in both Q1 & more so in Q2. The near break-even on the EBITDA front in Q2 itself is a very big relief. Any further boost in order execution will lead to bigger boost in Suzlon's EBITDA in the coming quarters.

The following chart shows Suzlon's Quarterly progress on Total Income, EBITDA & Net Profit over the last 10 quarters. Note the improvement the company has posted in the last 2 quarters, compared to the immediately preceding quarters.

Suzlon's Order book stands expanded at over Rs.43,000 crores. REPower continues to win new orders at a pace faster than it's execution. Hence, it's order book is gradually increasing. In the first half of the current fiscal, REPower contributed nearly 80 to 85% of Suzlon's Consolidated revenues. The company's India division has started moving, but there is still work to be done to get to levels where it was about 4 to 6 quarters back. Suzlon Wind has done lots of restructuring work during H1 of FY'14. Hopefully, Suzlon Wind's order execution will improve substantially from Q3 onwards. Increasing order execution will give confidence to it's customers, vendors & partners, and this will ultimately help it win more orders in the coming quarters.

Suzlon's stock price has started moving up in the last couple of weeks. From levels of about Rs.7, it has now got into double digits. At a price of Rs.10/-, Suzlon's Market Cap on Fully diluted Equity Base will be close to Rs.2900 crores, which I feel is still very small compared to the company's potential. If Suzlon does manage to successfully get back to normal speed of execution in the next 3 to 4 quarters, it could be doing handsome levels of EBITDA & Cash Profits. And once the Cash Profits start pouring in, Suzlon could start reducing it's Debt burden. This could further boost Suzlon's valuation. But all these things could take upto 2 years of hard work for the company's management. But if they do manage, then Suzlon's valuation could easily scale upto well in excess of Rs.15 to 20,000 crores or more. 

Yes Bank vs HDFC Bank comparison, which one's better Value-for-Money

I had posted my views about Yes Bank about 3 months back. At that time too Yes Bank's stock price was trading at about Rs.375/- levels. During these 3 months, the stock was hammered all the way down to around Rs.225/- levels, but has pulled back upto Rs.375-380 levels now. There has been no change in my views about the potential returns from Yes Bank's stock in the coming 1 to 5 years duration. During this period, I received some requests to post comparison between Yes Bank & HDFC Bank, so that investors will get a better idea of the attractiveness of the former's Value.

In terms of Business size, HDFC Bank is little over 4 times bigger than Yes Bank, mainly because of it's age. Yes Bank is much much younger, but growing with the same measured technology-led, low-risk strategy that HDFC Bank has done over the many years. HDFC Bank continues to be the best performer in terms of consistency of growth & quality of assets, despite it's substantial size now. And that is precisely the reason why HDFC Bank commands a huge premium in valuations over all other Banks as well as Financial Institutions. Yes Bank is travelling on the same path that HDFC Bank has done. Only thing being, Yes Bank is much smaller in terms of size & much cheaper in terms of valuations, than HDFC Bank. So, I think there is an obvious opportunity to all those investors, who did not benefit from HDFC Bank's growth over the last decade & more. Invest in Yes Bank now & you could be riding a similar wave over the next 10 years. Oh yes, but don't forget to monitor it's performance periodically.

In the following table I have calculated per-share data for the Trailing-Twelve-Months period ending Sept.'2013 for both the banks for easy comparison. Why 'per-share'? The answer is: We look at share prices moving up & down. It is better to understand what that one share of the company represents in terms of business & profits. That is how we can judge it's valuation perfectly.

For this comparison, Results for the period October'12 to September'13 have been considered. The Equity Capital number is at the end of Sept'13. As we can see, Yes Bank's Total Income per share is nearly Rs.110 per share more than HDFC Bank's number. But Yes Bank's Interest cost is nearly Rs.101 per share more than HDFC Bank. In the end, what remains is the Net Profit per share (also known as EPS). Here too Yes Bank's figure is higher at almost Rs.41/- compared to HDFC Bank's less than Rs.32/- per share. Despite having a higher EPS number, Yes Bank's share price (@Rs. 378/-) is way lower than HDFC Bank's (@Rs.683/-). Hence, Yes Bank's current valuation is much much lower at just over 9 times it's EPS, compared to HDFC Bank's at 21.5 times it's EPS.                                                                                                                                          Apart from way cheaper valuations, what is even more important to note is Yes Bank's growth track record. Yes Bank's Total Income has grown at 30% Y-o-Y, faster than HDFC Bank's growth of 21%. Interest Cost, which is any Bank's biggest Expense, has shown improvement. Yes Bank's Interest Cost has grown at less than 24%, which is more than 6% lower than it's Total Income growth. This is a clear reflection of Yes Bank's increasing CASA deposits, which are generally also seen as low-cost deposits compared to Fixed Deposits from Retail as well as Corporate clients. On the other hand, HDFC Bank's Interest Cost has grown by 19.5%, which is just 1.5% lower than the Bank's Total Income growth. However, CASA deposits forms just about one-third of Yes Bank's total deposits, while it is about two-third for HDFC Bank. Yes Bank's Retail Branch expansion (has 500 operational branches now & growing) is helping it increase the contribution of CASA deposits. I am expecting CASA deposits to form nearly half of Yes Bank's total deposits in the next 4 to 6 quarters. This will further help bring down the overall cost of funds for Yes Bank & boost it's margins & EPS.

All this should lead to narrowing the valuation gap between Yes Bank & HDFC Bank over the long term. A growth of >25% over the next two years can take Yes Bank's EPS to Rs.62 to 65 region. I think a P/E ratio of atleast 13 to 15 will be reasonable for Yes Bank by then, which will translate into a fair value of around Rs.850/- in the next 2 years time. This could very well be a reality as 2 years a substantial amount of time for the markets to re-rate a stock.

Happy Investing!!!