How RelJio's Financials could impact Reliance Industries Ltd's Quarterly Results

Reliance Industries Ltd (RIL) is a behemoth when it comes to Total Income numbers with an annual figure of close to Rs.4,50,000 crores, which translates into an average Quarterly number in excess of Rs.1,00,000 crores. About 70% of RIL's Total Income comes from it's huge Refining business, 20% from it's Petrochemicals business and the rest 10% is contributed by it's Oil & Gas business and it's Retail business combined. On the Net Profit front, RIL does about Rs.5,500 crores on a Quarterly basis and about Rs.22,000 crores annually. Most of the Net Profit comes from Refining & Petrochemicals businesses. Oil & Gas business is around the break-even level at a Net basis and the Retail business has just broken-even at an Operating level.

With RIL's biggest & most ambitious investment in any new business set to start it's journey anytime now, let's try & build some estimations on how it's financials in the first few quarters will be & what will be it's impact on RIL's consolidated numbers. The preparation for the journey is almost complete with RIL already having invested close to $11 billion in acquiring spectrum in 2300 MHz & 1800 MHz bands and building network infrastructure across the country and setting up Data Centers at several different locations to handle the huge amount of Data Traffic expected to travel on it's 4G LTE network. Until the company starts commercial operations of it's 4G services, all it's expenses related to that business will be Capitalised & will be considered as CAPEX. As soon as the 4G services are launched, the regular Profit & Loss account will be prepared for that business.

As per media reports, RelJio is expected to have a Network coverage in about 5000 cities & towns and another 4,00,000 villages within a few months of launch, if not at the start itself. This coverage is not much less than the kind of coverage that Airtel or Vodafone or Idea Cellular have at the moment, after being in the business for nearly 2 decades. Let's say that RelJio's expected coverage is about 75-80% of the coverage of any of the Top-3 operators. RelJio is also expected to have set up over 1,00,000 BTSes, most of them on Rented Towers. Compare that to a number of about 1,45,000 BTSes active on Airtel's Network. So, in terms of Network Operating Costs, we can expect RelJio's costs to be about 70% of Airtel's costs. Taking Bharti Airtel's latest Quarterly numbers as a reference, the Operating Costs + Employee Costs for RelJio could be in the region of Rs.3000 to 4000 crores per Quarter. So RelJio will be able to break-even at an EBITDA level as and when it manages to generate a Quarterly Revenue of around Rs.4000 - 5000 crores.

Now the question is: By when will RelJio be able to generate revenues of around Rs.5000 crores on a Quarterly basis?

As per media reports, RelJio's plans involve being more than just a Wireless Data service provider. RelJio already has acquired lots of content that it will offer it's customers over it's Fibre network as well as it's 4G LTE network. It includes Television services, Movies on Demand, Episodes of popular TV Serials/Shows on Demand, possibly even Educational services where Live or Recorded lectures of certain courses from certain institutes can be accessed sitting at home. Infact a reliable High-speed Internet backbone can be used to provide services in various categories like Entertainment, Education, Security, Healthcare, etc. With the advent of 4G networks, we could see more & more people using Video-call services as well. The point I am trying to make here is that considering RelJio's plans, the ARPU (Average Revenue Per User) per month for the company will be much higher than what other operators enjoy. I am expecting RelJio's ARPU to be atleast around Rs.700 per month.

The main target customers for RelJio are the ones who are currently using 3G services or USB Dongles. They are currently giving substantial revenues to existing operators. They are the ones who will shift to using RelJio's services. On a conservative side we can expect between 1 to 2 million customers to take up RelJio's 4G connection every month. Initially most of them will be buying the 4G MiFi device, which can support upto 10 WiFi devices at a time. There are millions & millions of Smartphones, Laptops & Tablets with customers across the country, which do not support 4G network, but can use WiFi services. RelJio will be targeting all these customers with the MiFi device. At the same time we are already seeing 4G Smartphones being introduced in India and many more are on the way in coming months. It will take atleast 6 to 9 months for the 4G Smartphones to get popular amongst the buyers.

To calculate the EBITDA Break-even point for RelJio, I have kept my estimates simple & conservative. I have estimated a monthly addition of 1 million new customers & an ARPU of Rs.700/- per month. That will mean a recurring revenue addition of Rs.70 crores every month. At this rate, RelJio should be close to EBITDA break-even in about 6 to 8 Quarters time.

During the First Operating Quarter for RelJio ( RJIL - Reliance Jio Infocom Ltd ), the company is expected to post a mammoth EBITDA as well as Net Loss. The EBITDA Loss could be to the tune of over Rs.2500 crores and Net Loss could be in excess of Rs.4500 crores. In addition to the EBITDA Loss, there will be things like Depreciation, which is expected to be to the tune of atleast around Rs.1500 crores, and Interest Cost, which is expected to be well in excess of Rs.500 crores. Hence as & when RJIL launches it's 4G service, the first quarter is expected to be the biggest Pain Quarter for Reliance Industries Ltd's Quarterly result. RIL's Consolidated Net Profit could get wiped out to the extent of 80 to 90% in the first quarter. But the Pain will reduce with every passing quarter as the Revenues build up at a handsome pace. Eventhough RJIL is expected to Break-even at an EBITDA level within 6 to 8 quarters, it will continue to post Net Loss for 3 to 4 more quarters after EBITDA break-even. So, RJIL's financials are expected to have a negative impact on RIL's Quarterly numbers for about 8 to 10 Quarters, with the impact being the maximum in the initial quarters and reduce substantially with every passing quarter.

For RJIL to take rapid strides on the subscriber acquisition front & on the Revenues chart, it will have to do a stellar marketing of it's services and offer a good service experience to all the customers joining their network. The initial months will be full of euphoria but after that it will be the marketing & word-of-mouth that will enable the company to pile up new subscribers & revenues. Let's see how & when things unfold, but please be prepared to see a negative impact on RIL's Quarterly results initially because of RJIL's Financials.

Happy Investing !!!

Airtel's plan to charge Data usage for VoIP calls separately is plain stupidity!!!

Over the past 2-3 days we have been reading that Bharti Airtel plans to exclude Data usage for VoIP calls from the Data Packs activated by a wireless customer and charge it at a standard rate of 4p/10KB for 3G customers, which translates into about Rs.4 per MB. Rates for 2G customers is 2.5 times higher, but it's pointless as 2G network is not suitable for VoIP calls. With a VoIP call needing about 0.5 MB to 1 MB per minute on 3G network (depending on the VoIP service provider's efficiency), the Data Usage charges alone will be atleast Rs.2 per minute, making it senseless for most users, except for those who make International calls to regions where Call Rates are expensive. And the customer might even think of moving away from Airtel if it persists with this new policy and other operators do not adopt this policy towards VoIP calls.

Apart from the economic reason from the customer's point of view, another reason why this new policy is Plain Stupidity is that it might not please the regulators. Until now most operators had specific plans for Facebook / Whatsapp usage, which made sense especially for those customers who use their Smartphones primarily for those apps. Such plans brought down the monthly Data cost for those customers to more attractive levels. Such plans were not premium plans, they were aimed to bring down the cost for the customer and the operator also benefits by encouraging more & more Smartphone users to try Data service. This VoIP usage exclusion policy will make it very expensive for customers using that service and hence the Regulators will step in to avoid that possibility very soon. In any case Customers themselves will shift their usage to other service providers and ultimately Airtel will lose some portion of their Data Volumes from all such customers.

Overall, this new VoIP tariff policy adopted by Airtel is neither good from the customer's economic point of view, nor is it good from the Regulatory angle, nor is it good from Airtel's own Data Volumes growth angle. Airtel will have to immediately introduce some new plans specific to Data usage for VoIP calls, which don't make VoIP usage so exorbitant. Such plans will give a little more flexibility to customers who do make good use of VoIP service, but I still feel that it won't make economic sense unless those plans bring down the cost of Data usage for VoIP to levels on par or lower than rates charged in other Data packs. This I feel is an unnecessary complication that the operator is adding.

Fear of RelJio launch pulling down Telecom stocks.

Earlier in May'14, I had written about the stupendous pace of growth being experienced by all Mobile Operators in their Wireless Data Service business. (Click here for that article. It will open in a new window) As expected the Wireless Data business is the one that has been driving all the growth for Mobile service providers. This business has not just boosted revenues, but profitability too has improved sharply. This is especially evident in the quarterly results of Bharti Airtel and Idea Cellular. If one looks at the results, times have never been better for Idea Cellular on the profitability front. Even for Bharti Airtel the numbers have sharply perked up in the recent quarters. The demand for Wireless Data is growing at such a pace that all the players have confidently hiked the rates for all their 2G Data plans by as much as 50-70% in the last 1 year and none of the Top-3 have cut their 3G data tariffs until now. Smaller players like Tata Tele, Aircel & even RCom have started offering attractive 3G Data plans in the recent months.

But the demand is so high that customers have shown very high levels of elasticity in Data tariffs. It's quite obvious that Internet usage is very very addictive as well as infectious. Many people are upgrading their Smartphones almost every year and with newer Smartphones they need faster Internet speeds too. But despite all these positives for Telecom operators, almost all of them have seen their stock prices correct sharply soon after hitting new peaks sometime around September-end or early October this year. Both Bharti Airtel & Idea Cellular are down by about 20-22% from their peaks, while stocks of RCom & TTML have seen much sharper falls.

The reason for this correction, as the title of this article suggests, is the upcoming launch of RelJio's 4G services. As per expectations, RelJio's 4G tariffs are going to be atleast 50% cheaper than the 3G tariffs currently charged by the trio of Airtel-Vodafone-Idea. And the 4G speeds will be 5 to 10 times faster too. If these rumours/expectations do turn out to be true, then all these 3G operators will have no choice but to sharply cut their 3G Data tariffs to levels under RelJio's 4G plans. And RelJio is also expected to have a network coverage which is as good as that of the competition (all combined together!!!), if not wider than them. This means the existing 3G operators will have no major advantage over 4G service, except for maybe the fact that the Smartphones that people are currently using are not 4G compatible and the users will be forced to either replace their phones or invest in an additional device which will convert 4G signals into Wi-fi signals. I don't think this is a very big impediment and a huge portion of the user base can think of shifting to 4G in the first year itself.

As per the launch dates for RelJio, nothing has been finalised as yet. But there is a strong expectation that Mukesh Ambani will think of repeating the feat of launching his mega telecom venture on his father's birth anniversary on 28th December, just as he had done with Reliance Infocom about a decade ago. Even if it doesn't happen on 28th December, the rollout across the country has to happen before the end of May'2015. That means there is a window of only 5 more months within which RelJio has to start it's commercial services. As per the newsflow we have seen in the recent months, RelJio had started testing it's network for security & compliance as well as performance, over a month ago. RelJio also has tie-ups in place with all Telecom Tower companies. It has laid it's own fibre-optic cable network on all routes where the traffic is expected to be the maximum. And RelJio now has a Data Center capacity which can easily claim to be the highest in the country, even overtaking Tata Communications' capacity, which is a leader till now. All these indications are clear enough to suggest that RelJio's network coverage & capacity will be good enough to accommodate a huge number of subscriber base with very high usage levels. Not just that, RelJio is even expected to launch multiple services where it's network can act as a backbone. Television service as well as Movies on Demand is one such example. There will be many more in various different fields like Education, Security and various other Internet-of-Things applications. We will come to know about them in the near future.

The way Telecom stocks will behave after RelJio's launch will depend on how well they are able to compete against it in trying to protect their Revenue-Market share. We are certainly going to see some casualties in the Telecom sector in the next 1 or 2 years or some large M&A deals happening. Bharti Airtel is already preparing it's war-chest by building a strong Capital base by divesting it's tower assets in Africa and raising more resources in the form of ECBs. Idea Cellular & Vodafone too are currently in a very healthy financial state & have able promoters who can infuse more funds. But an M&A deal involving any one of these cannot be ruled out. The obvious potential casualties are RCom, Tata Tele, Aircel, and other fringe players like Telenor, MTS & Videocon. There is a possibility that RCom will be saved by RelJio. Tata Tele has already made it clear that it is not too interested in remaining in this business & will be happy to merge into another stronger player, possibly Telenor or MTS. But valuations will play spoilsport as Tata Tele's financial health isn't good currently and it could worsen rapidly once RelJio's launch happens. Aircel's future is equally uncertain & problems are quite similar to that of Tata Tele. Large Debt & Cash Flows are not strong enough to attract a buyer. MTS too has said that it can bring more capital & look at acquiring an existing operator, but the M&A rules need to be simplified. Videocon too might get acquired or shut down by selling off it's spectrum & license.

To summarise, the next 12 months are going to be very very exciting for the User base, but very very challenging for those who are Invested in Telecom stocks. I think Bharti Airtel, Vodafone and maybe Idea Cellular (either singly or by aligning with another player) will be able to face RelJio's challenge in the market place. But their businesses may not post any positive growth in the first year or two of RelJio's launch, until things stabilise and some of the smaller competitors shut down their operations or merge. The first 2 years will be a fight to protect their existing Revenue-base.

My expectation is that in 4 years time RelJio will be amongst the Top-3 service providers in terms of Revenues, either organically or inorganically.

Ignore all the Negativity: Time to Dig-into Indian stocks

Last 10 days have been time for some good amount of correction, not just in the Indian markets, but globally. In fact the correction has probably been instigated by the substantial fall in Crude prices, which are down by a whopping 40% in just the last 2-3 months. As we all know Crude does impact economies of almost all countries, either positively or negatively, and there is a lot of International money movement happening to take care of Crude payments. Hence the huge fall in Crude prices is even impacting the Currency rates across the globe. Add to all these factors the fact that the year-end Christmas vacation is approaching, which is a very important festival for most of the western world.

The NIFTY Index is today at levels around 8100, down by a good 500 points from the peak of little over 8600 it hit recently. Most of the Blue-chip stocks are down by around 10% or so, except for Bank stocks, which haven't corrected much. This is a very healthy correction. But as with any sudden correction, most Business News channels start talking all Negativity and predicting more downside in the markets. Remember all that talk is for short term traders.

Investors who have either a medium term or long term outlook, should take advantage of this opportunity and tank-up on their favourite stocks. The HUGE correction in Crude prices is a Very Very Very BIG Positive News for Indian economy. And reports suggest that the Crude prices could remain in the $40 to $80 per barrel range for the next few quarters. This factor alone will prove to be a big booster for Indian economy in the coming months. And hence it will be an excellent idea to buy stocks which can benefit from an expanding Indian economy.

The direct benefit of lower crude prices will be felt by companies which use Crude or it's derivatives as an Input/raw material, which includes industries like Paints, tyres, certain Chemicals & even Petrochemicals. Oil Refining & Retailing companies could also be amongst the larger beneficiaries. The secondary beneficiaries will be all those companies who spend substantial amounts on transportation of goods, either raw materials or finished goods. Almost all manufacturing companies & all Logistics companies come in this category as they have varied requirement of 'Transportation' in their business. Even Telecom tower companies who spend substantial amounts on Diesel to run their generators will benefit from this price correction.

The other part of this benefit is going to be the falling Inflation, which will not just help consumers spend more, but also will allow RBI to reduce Interest Rates in our Banking system, sooner or later. Here again all companies who borrow Capital from Banks, either for CAPEX or for Working-Capital purposes, will be beneficiaries. This benefit will be felt a quarter or two down the line. But it's coming for sure and will boost profitability of most companies.

Mark my words, Indian markets will be rallying in the near future, primarily because of Crude Oil price correction, provided the prices remain under $80 per barrel range for a substantial amount of time. And hence this correction is an excellent time to tank-up for good quality stocks.

Educomp Solutions: Rumours about sale of K-12 business subsidiary, Pros & Cons

There have been rumours floating the market after a news report said that Varkey Group & the Birla Group are in talks to acquire Educomp Solutions' K-12 business subsidiary. Educomp Solutions owns 75-80% stake in that subsidiary, while the rest is held by Educomp's promoter Shantanu Prakash. The News report published by Times of India/ET in the month of September mentioned that the Buyers are valuing the business at about $250 million, including the debt of about $150 million. That means the Equity will be valued at about $100 million.

If this News Report does turn out to be true along with the valuation numbers, then Educomp Solutions will receive about $75-80 million for it's stake, i.e. about Rs.450 to 500 crores. Shantanu Prakash will receive about Rs.120 to 150 crores for his stake. First lets look at the positives: Firstly, Educomp's Consolidated Long Term Debt of about Rs.3200 crores (at the end of Sept.'14) will reduce by about Rs.1000 crores, which is the K-12 subsidiary's debt. The Rs.450-500 crores that Educomp Solutions will receive for it's stake will further help reduce it's own debt or a part of the Cash could be used to fund expanding it's core business of SmartClass & other such products like SmartClass Tab, English Mentor, etc. More than the company, the promoter Mr. Shantanu Prakash might be more keen on encashing his stake as the Cash he receives can help him fulfil his commitments towards the CDR scheme. Last month, the company had announced that the promoter had pumped in about Rs.30 crores in the company, but I am sure that he needs to bring in more funds. All-in-all if the deal does go through in the expected manner, then it will help improve Educomp's existing Cash position as well as help improve the future Cash Flows as the Interest Cost could reduce by 30-40%.

Coming to the Negatives: Educomp will be exiting a business which has big potential at a distress-sale like valuations. The buyer knows that Educomp is in dire need of funds and hence is negotiating hard to pull down the valuations. We all know that the K-12 Schools business has HUGE potential, but Educomp will need much more funds to expand this business and bear losses in the initial years until the schools mature. And unfortunately, Educomp currently does not have that capacity.

What could be best is that Educomp brings in an Investor by selling only part of it's stake and Mr. Prakash selling his entire stake. Educomp could continue holding something like 49% or atleast 26% stake in that business. The money that the new Investor brings in could help the K-12 subsidiary get back to growth ways. If Educomp does exit completely, I am sure there will be non-compete agreement too signed where Educomp will be barred from re-entering the K-12 business for a period of atleast 5 years or so. That too will be OK as Educomp can use these 5 years to get back to strong profitability and a strong Balance-sheet position and then look at re-entering the K-12 schools business in a measured way.

Either way you look at it, there are more positives in this deal than negatives.

Educomp Solutions - Post Q2 FY'14 update

Prima-facie the numbers announced by Educomp for the Jul-Sept'2014 quarter were slightly on the disappointing side. Total Income of about Rs.151.50 crores up by just 3% Q-o-Q against my expectation of about 10% growth. Operating expenses were very well contained and dropped by over 10% Q-o-Q, but higher Other expenses (including provision for Foreign Exchange fluctuations) pushed Educomp into an EBITDA loss of Rs.9.5 crores. Substantial Interest Cost and another Huge round of Write-offs meant that the reported Net Loss figure this quarter was larger than the Q1 figure.

But here again lots of developments are hidden in the Balance-sheet & Capital Employed numbers and the Notes to Accounts. The write-offs done this quarter are Huge at about Rs.467 crores, which included about Rs.271 crores from Trade Receivables, Rs.110 crores towards an advance given to it's Higher Education subsidiary, Rs.52 crores towards an advance given to it's K-12 business subsidiary and Rs.33 crores towards a loss booked on a property sale.

Now lets come to the good news part, which are hidden in the Capital Employed numbers. During the June'14 quarter, Educomp's Consolidated Capital Employed number had dropped from Rs.2471 crores at the end of Mar'14 to Rs.2124 crores at the end of June'14, i.e. a drop of about Rs.347 crores. Even if we exclude the Write-offs of about Rs.250 crores done during June'14 quarter, the company had a positive Cash Inflow of about Rs.97 crores. The Consolidated Capital Employed number has dropped further (sharply) to Rs.1510 crores at the end of Sept'14 quarter, i.e. a drop of about Rs.614 crores. Excluding the Rs.467 crores in Write-offs done during the quarter, the company had a positive Cash Inflow of about Rs.147 crores. Eventhough these Cash Inflow figures aren't huge, but they are good enough to give us a hint that things are moving in the positive direction as far as the company's overall financials are concerned.

During Q2 Educomp concluded the deal to sell it's GateForum business. The sum realised is Rs.35 crores. This too has helped bring down the Capital Employed number by about 2%. In the coming quarters we will see a few more Land parcels being sold by the company, mainly via it's subsidiaries. Another hint of positive developments in recovery of receivables is in the Total Dues number from various trusts to Educomp's K-12 business subsidiary coming down from Rs.249 crores to Rs.228 crores from Jun'14 to Sept'14. This amount of Rs.21 crores is even higher than Educomp's reported revenue of about Rs.17 crores for Q2 from it's K-12 vertical.

Coming to the Revenues part, I was slightly disappointed with the figure from School Learning vertical where revenues dropped by about 4% Q-o-Q, whereas I was expecting a growth of over 15%. But what I had forgotten is that some of Educomp's old contracts with Govt schools could be coming to an end and hence the some of those recurring revenues could be missing from this quarter onwards. We still don't know the exact reason, but this is one possible reason for the drop. Traditionally the second half of any fiscal has been busier for Educomp and we can expect the same this year. For first half Educomp's consolidated Total Income is about Rs.299 crores, which should rise to atleast about Rs.350-400 crores during the second half. And we can expect most of the Write-offs to be done with during this fiscal itself and going forward the company can be expected to focus more on growth of fresh business, rather than cleaning up the books dirtied in the last 3 years.

I am still positive on the company's possible turn-around & return to growth as well as decent profitability (on EBITDA front) by the end of this fiscal. I think another 1-2 quarters of challenging patience is required for Educomp's shareholders.

Zicom Electronic Security Systems Ltd. - Valuations have finally started moving !!!

As I have been saying in my previous reports on Zicom, this company is expected to grow at a steady pace, not at a super-fast pace. Zicom is a profit-making company & with increasing scale of operations, we can expect the profit margins to expand to some extent, not from it's products business, but from the services business. As of now services business is very very small part of Zicom's total business. It will reach a significant proportion only about 2 or 3 years from now. And that is when we will see Zicom's profit margins to be much better than what they are today. As of now Zicom's EBITDA margins are around the 12% mark & Net Profit margin is around the 4.5% mark. We can expect a 200 bps improvement in EBITDA and atleast 100 bps improvement in Net Profit margin over the next 2-3 years.

Zicom has achieved a significant milestone in Q2 FY'14. Zicom's Total Income on a T-T-M basis have crossed the Rs.1000 crores mark and now stand at Rs.1027 crores. The Y-o-Y growth currently stands at about 29%, but I am expecting the growth rate to slowly calm down to levels closer to 20% in the coming 4-6 quarters. Infact I will be happy with a number anywhere over 15% Y-o-Y for the next 2-3 years. Another important aspect which can help Zicom improve it's Net Profit margin is the Interest Cost management. In the three quarters prior to Q2 FY'14, little over 34% of Zicom's EBITDA went towards it's Interest Cost, which is pretty high. In Q2 the same is down to little over 29%. This helped push the Net Profit margin in Q2 closer to 5% mark. Lets see if this is a one-off or Zicom manages to control it's Interest Cost in the coming quarters.

Now lets get to the Valuation & stock price movement part. And there is some good news for all new as well as older shareholders of Zicom. After spending a lot of time within a very tight range of less than Rs.70/-, Zicom share price has finally got moving over the last 6 months. The stock price has doubled to levels of about Rs.140/- now. This is still very very cheap at a little over 5 times it's T-T-M EPS of about Rs.27/-. With Zicom expected to post 20%+ growth in the coming quarters/years, I certainly think it deserves much higher valuation. I won't be surprised even if Zicom's share price doubles again from the current levels over the next 6-9 months and it still won't be expensive on the valuation front. But remember that the share price movement is difficult to predict as to when it will stop moving & when it will start moving again. A lot depends on how large Institutional Investors trade in this stock. So this stock is best suitable for investors who have good amount of patience.

Suzlon Energy - Q2 progress has been a bit slower than expected

Suzlon reported a Total Income of just under Rs.5400 crores, with an EBITDA of Rs.127 crores & Net Loss of Rs.656 crores. The Total Income was up by about 12% Y-o-Y, which is OK, as Q1 & Q2 are generally the slow quarters and the company does most of the business in the second half of any fiscal. The progress on the profitability front was a bit disappointing. EBITDA margin has improved from 1.82% in Q2 to 2.36% in Q2. I was expecting a bigger improvement in EBITDA margin, it should have been atleast 4% in Q2 and improve to a range of 7% to 10% in Q3 & Q4. Any substantial improvement in EBITDA margins will directly result in a drop in Net Loss numbers.

For the first half of current fiscal, Suzlon has reported a Total Income of just over Rs.10,000 crores. My earlier estimates were that Suzlon will post Total Income for FY'15 at about Rs.25,000 crores, which is still possible or a number close to that. On the EBITDA margin front, my earlier estimates of 7-8% seem difficult to achieve. The First half margins of just over 2% are the main culprit. The reasonable expectation of EBITDA margin for H2 is 7-8%, which will bring the overall margin to about 5-6% levels. The overall EBITDA should translate into Rs.1250 to 1500 crores for the fiscal. The Net Loss for H1 of this fiscal is Rs.1406 crores. For H2, Suzlon is expected to closer to Zero Loss number. Lets see if Suzlon manages to meet these lowered expectations for this fiscal.

On the Valuation front, I am still expecting Suzlon's Fair value to be around Rs.10,000 crores by middle of next year. At this point Suzlon's Equity Capital consists of little over 305 crores. If this number stays the same, then it will translate into a fair value of about Rs.30-32/-. But I am sure that further Equity dilution will happen as soon as the share price moves beyond Rs.15-18 levels. So the Fair value price per share will proportionately reduce depending on the Equity Dilution.

Reliance Industries Ltd. - Poised for some interesting times ahead

Look at Reliance Industries Ltd. It is amongst the largest companies in India on several counts. With Annual Revenues of about Rs.4.50L crores, Net Profit of over Rs.23K crores & a Market Cap of over Rs. 3L crores, it certainly is a Mega corporation. But look at it's current businesses. Over 90% of the company's revenues and about 80% of profits come from Refining & Petrochemicals business. And these businesses are not posting any handsome growth for the last many quarters. At best these businesses will grow in single digits or low double digits in the coming quarters.

A few years ago Reliance Industries Ltd stepped into new businesses of Oil & Gas production and Modern Retail. As we all know the Oil & Gas production business of the company has been a big disappointment mainly because the initial estimates & projections were very large & exciting, but the actual numbers have been quite lacklustre in comparison. Nevertheless this business is chugging along & profitable too. But it is difficult to predict if this business will grow to a much larger scale or not. Reliance's Retail business did have a false start initially, but the company has done well to make a smart comeback over the last 2-3 years. Reliance is now India's largest Retail company, having overtaken Future Group a few quarters ago. Eventhough the Retail business is currently contributing only about 3-4% of Reliance's annual turnover, it is growing at a healthy pace of about 15-20%. And the better news is that the business has reached break-even too at the operating level. With further expansion the economies of scale will further help the company improve profitability and sooner or later it will start posting Net Profit too. Reliance Retail already has over 2000 stores operational across all formats and cater to millions of customers across several large cities.

Now lets come to the most interesting part of Reliance's large investments: Broadband. Many of us have been hearing about Reliance Jio Infocom (RelJio) being the only company to hold broadband wireless spectrum across the country. We have been hearing this for the last over 4 years now, but we haven't seen any launches happening. As per regulatory requirements, RelJio needs to launch it's services in all service areas latest by second half of 2015. What was the company doing sitting idle with all that spectrum for nearly 20% of the license period?? Frankly I think it was an intelligent move. 4 years back the LTE technology was still at an experimental stage and all it's equipment were very expensive. Thanks to this delay, RelJio will be able to install equipment which is better evolved and at much lower prices. The technology is still very new even at a Global level, but availability of it's equipment is now much much better than what it was 4 years back. Over the last 3-4 quarters, the activity at RelJio has shot up with the company first signing up agreements with almost all Tower companies & then signing agreements with Equipment Vendors for implementation of BTSes across the country. The company has been laying it's own OFC across most of the important cities as it is anticipating a huge load of data traffic on it's Wireless Broadband network. The company had paid something like Rs.12K crores for the Broadband spectrum, but it is investing well over Rs.50K crores to setup all the related infrastructure across the country. These numbers are not too short of what any other Mobile Operator has invested in Infrastructure for a nationwide rollout. Going by these numbers, RelJio is planning to launch it's services in thousands of cities & towns and lakhs of villages in the very first year itself. To make things even more interesting RelJio has bagged 1800 MHz spectrum in 14 important circles, which can help the company jump right into regular mobile service competition as well.

I am expecting RelJio to launch it's services on 28th December'2014, Dhirubhai's anniversary and the phased rollout will happen over the first half of 2015. As per my estimates RelJio will be targeting to achieve Quarterly turnover of Rs.4K crores within the first 4-6 quarters of launch. RelJio could be posting a turnover of about Rs.10K crores in FY'2015-16 itself and will be close to breaking even at EBITDA level. Within a few months of RelJio's launch we should see a price-war in the Data business. If RelJio's service experience is good, then even a price-war cannot stop the company from capturing substantial incremental as well as existing market share from all other operators. RelJio could touch 10% market share figure in the Data business within the first 4 quarters itself, provided the initial customers are happy with the company's services. If there is a neutral-to-positive word-of-mouth about RelJio's services in the first 2 quarters, we could see many customers jumping from other operators to RelJio's networks to enjoy faster speeds and larger usage limits. The first 2-4 quarters from launch are going to be crucial.

If everything works out fine, we could see RelJio touching the Rs,50K crores turnover mark within the first 5-6 years and by then the company will be generating healthy Cash Profits and Net Profit too. The Retail business expansion alongwith the huge potential in the Telecom business is what will bring the exciting times for Reliance Industries Ltd & it's shareholders. The company's stock has been underperforming for the last many years now. There have been valid reasons for the same. The revival in Indian economy will also help boost demand for RIL's petrochemical products and who knows the company could get back into fuel-retailing in a big way too in the coming couple of years. There are many potentially positive things that could happen with the company. The stock price which has been languishing in the Rs.700 to 1100 range for all of last 6 years, finally could breakout above the Rs.1100 price levels in the coming quarters.

Side-effects of Crude Oil Price correction

Over the last quarter or so, the International Crude prices have come down from levels of about $110-115 range to now under $90, i.e. a fall of over 20%. The $ value too has remained relatively steady in the Rs.60-61.50 range. India imports nearly 80% of it's Oil & Gas requirement and any change in the International price has a bearing on the overall cost-of-living of all citizens, directly or indirectly.

The Petrol prices in our country were completely deregulated over a year ago, which led to the retail prices shooting up past the Rs.80/litre mark a few months ago, when the Crude Oil prices were in the $110+ range. Over the last couple of months, we have seen Petrol prices being reduced regularly and are now lower by about 8-9% from it's peak levels. It's obvious that the PSU Oil companies which control almost the entire fuel-retailing market has not passed on the complete benefit from the falling crude prices, which had corrected more than 15% from it's peak at the time of last revision. They are certainly keeping some cushion, i.e. extra profits to themselves, maybe to compensate themselves for the difficult period they spent when the retail prices were forcibly kept at below-cost levels by the government. And the other factor is that there is no real competition in the market. IOC, BPCL & HPCL all are government owned (majority stake) companies and they can easily form a cartel to decide on the retail prices during each revision. They can discuss on how much benefit to pass on & how much to retain with themselves. The private sector fuel retailers were lying dormant for many years when the fuel prices were under regulation & it was a loss-making business. Since last year, Essar Oil & Shell have started seeing lots of activity in their retail operations, atleast for sales of Petrol. Since the last 2 months, the regularly-revised Diesel prices too have reached the market-rate levels. And deregulation of Diesel prices will be officially announced very very soon. This has now prompted the private fuel-retailers to seriously start re-opening their old outlets & even think of starting new outlets. Reliance Industries too has started operations at it's company-owned outlets and will expand operations at dealer outlets as well sooner or later.

Now the question is: How do we benefit from all this?? While Petrol prices were being raised as per market rates & the Diesel prices were raised at the rate of 50 paise/month, the overall cost of all goods we consume was going up as fuel prices directly impact transportation costs. Even our cost of commute was going up irrespective of the fact whether we used public transport or own vehicles. All this had a direct impact on the Inflation & hence on our expenses & hence our savings and investments. Even while all this was going up, there was a small indirect benefit we had. As Diesel prices were raised in steps, the overall subsidy burden on the government was going down in steps. This will have an indirect impact on our lives as the government will have more funds available for public projects and maybe they might not need to raise tax burden on us in the subsequent budgets. This benefit is neither quantifiable nor seen by us immediately. But we do get it over a period of time.

Now lets look at the situation where we are in now, i.e. the International Crude prices are falling, which has led to reduction in Petrol prices and the Diesel subsidy going to Zero and infact we could be seeing a reduction in Diesel prices very soon. All this is Doubly Positive for all citizens of India. Every reduction in Diesel prices will have a direct impact on cost of goods we consume & our travel costs. This will ultimately bring down the inflation levels, will reduce pressure on our expenses & possibly we will be able to save more & invest more. At the same time the Govt will be freed from Diesel subsidies, which was a substantial portion of the annual budget until last fiscal. This money will be ultimately used to build public infrastructure & other public projects.

Another positive side-effect of all this is the possibility of Loan Interest rates going down. RBI, which periodically announces it's monitory policy, has been concerned about the high inflation levels we had seen for the last 5-6 years. And hence RBI had kept tight control on the liquidity available in the Financial System. This led to the loan interest rates remaining at a higher level. Thanks to the reducing fuel prices, we could see Inflation coming down in the coming months. This could allow RBI to increase the availability of liquidity in the System, which will ultimately allow banks & other financial institutions to reduce interest rates charged on all types of loans. And once this happens, this will further boost economic activity across the country.

India's economy as a whole has HUGE benefits coming it's way if the Crude Oil prices continue to remain at levels below $95 per barrel. Anything lower and it's an added bonus. These benefits will start reflecting in the overall economic activity & the performance of different companies from various sectors, with a lag effect of atleast 2-3 quarters. The stock markets sooner or later will start factoring in these potential improvements. This current correction in the markets should be taken as an opportunity to invest.

Few companies in India will not benefit from the falling Crude prices and they are mostly the Oil & Gas producers. So companies like ONGC, Cairn India, Oil India, etc. which derive most of their income from producing & selling Crude Oil and Natural Gas will be in the list of non-beneficiaries.

Suzlon's price collapse: Is it time to Panic?

There was panic amongst Suzlon's shareholders on Friday, i.e. 19th Sept.'14, when the company's stock price hit Lower Circuit within minutes of starting to trade at 9:15 am. Hitting the Lower Circuit was nothing new for Suzlon's counter, but the Panic was due to the quantity of shares up for Sale. There were over a crore shares up for sale in the early minutes and the quantity kept piling up through the day with every passing hour. By the end of the trading on Friday, the Quantity had increased to about 10 crore shares. During the day nearly 92 lakh shares were traded on NSE alone and as expected most of them went for delivery. Monday was no different as over 15 crore shares were put up for Sale on NSE and only about 34 lakh shares were purchased.

The reason for this huge Sale quantity since Friday is that part of the FCCB holders converted their Bonds into Equity shares of Suzlon & they are cashing out. About 13% of the total FCCBs were converted into shares this month & the total quantity issued is 27 crore shares of Suzlon & it's pretty obvious that these holders are in a big hurry to cash out. What is foxing me is that why will these Institutions put such large Sell orders in one go, which is bound to scare away genuine buyers too. Any potential buyer of Suzlon shares will certainly postpone his/her purchase decision thinking that such large Sell orders will bring the price further down in a few days & it will be more attractive to buy then. Some buyers will even start questioning whether Suzlon's business recovery is actually true or not as for many shareholders the share price movement reflects the positives or negatives happening in the company's operations.

Now the Question that arises is till when will this slide continue? If we believe that the FCCB holders who converted their bonds into shares are lining up to sell and they seem to be in a tearing hurry to cash out, then will they stop selling at the price that they got their shares, i.e. about Rs.15.50/-. If they are too desperate for Cash, then some of them might continue to Sell even lower than that price. But atleast some of them who are not so desperate will withdraw their Sell orders and at the same time we could see some other large Institutions who believe in Suzlon's recovery to start buying the beaten down stock as it will get very attractive at the price of close to Rs.15/-. Even if we look from the valuation side, Suzlon was fairly valued when at Rs.20-22 range. In my previous post on Suzlon, I had mentioned that I am expecting Suzlon's Market Cap to climb to about Rs.10,000 crores by the end of this fiscal or middle of next calender year. At the end of June'14 quarter, Suzlon's Equity Capital consisted of about 271 crore shares. The company has issued about 34.2 crore shares this quarter including the 7.18 crore shares issued to CDR Lenders & 27.03 crore shares issued to FCCB holders. So the company's Equity Base has already expanded to little over 305 crore shares. At the price of Rs.18/-, Suzlon's Market Cap stands at about Rs.5500 crores, which is not far away from the company's current Fair Valuation.

Now here comes the Real Scary Part: Only about 13% of the FCCBs have been recently converted into shares, which translated into 27.03 crore shares. If the remaining FCCB holders also decide to convert their Bonds into shares, then another 181 crore shares will be issued by Suzlon, further diluting the company's Equity capital. And the scariest part is that all these Bonds will be converted into shares at a price of Rs.15.46/- each and at a Fixed USD rate of Rs.60.225/-. If all these bonds get converted into shares ( and I am sure they will convert at some point if the share price trades at a substantial premium to their conversion price ) then Suzlon's Equity base could be at a touching distance of 500 crore shares. The Equity dilution will be massive and then we can forget the possibility of Suzlon's share price flying away to much higher levels for a considerable amount of time. Every time it goes a bit higher, some of the Bond holders will convert their shares & Sell them to Cash Out.

After considering the possibility of FCCB conversion, I am of the opinion that Suzlon's share price might not go much above Rs.30 level for atleast the next 2 years. Approaching Rs.30/- itself will be very difficult. Other that the FCCB holders, the CDR Lenders are being issued shares at a price of about Rs.18.50/- with a lock-in period of 1 year from the date of issue. Sometime in 2015 even the CDR lenders could think of selling their holding if the share price is trading at a decent premium to their conversion price. One thing is for sure that Suzlon's share is not going to be a Multi-bagger until all these hangovers are eliminated. 

Suzlon's price collapse: Is it time to Panic?

There was panic amongst Suzlon's shareholders on Friday, i.e. 19th Sept.'14, when the company's stock price hit Lower Circuit within minutes of starting to trade at 9:15 am. Hitting the Lower Circuit was nothing new for Suzlon's counter, but the Panic was due to the quantity of shares up for Sale. There were over a crore shares up for sale in the early minutes and the quantity kept piling up through the day with every passing hour. By the end of the trading on Friday, the Quantity had increased to about 10 crore shares. During the day nearly 92 lakh shares were traded on NSE alone and as expected most of them went for delivery. Monday was no different as over 15 crore shares were put up for Sale on NSE and only about 34 lakh shares were purchased.

The reason for this huge Sale quantity since Friday is that part of the FCCB holders converted their Bonds into Equity shares of Suzlon & they are cashing out. About 13% of the total FCCBs were converted into shares this month & the total quantity issued is 27 crore shares of Suzlon & it's pretty obvious that these holders are in a big hurry to cash out. What is foxing me is that why will these Institutions put such large Sell orders in one go, which is bound to scare away genuine buyers too. Any potential buyer of Suzlon shares will certainly postpone his/her purchase decision thinking that such large Sell orders will bring the price further down in a few days & it will be more attractive to buy then. Some buyers will even start questioning whether Suzlon's business recovery is actually true or not as for many shareholders the share price movement reflects the positives or negatives happening in the company's operations.

Now the Question that arises is till when will this slide continue? If we believe that the FCCB holders who converted their bonds into shares are lining up to sell and they seem to be in a tearing hurry to cash out, then will they stop selling at the price that they got their shares, i.e. about Rs.15.50/-. If they are too desperate for Cash, then some of them might continue to Sell even lower than that price. But atleast some of them who are not so desperate will withdraw their Sell orders and at the same time we could see some other large Institutions who believe in Suzlon's recovery to start buying the beaten down stock as it will get very attractive at the price of close to Rs.15/-. Even if we look from the valuation side, Suzlon was fairly valued when at Rs.20-22 range. In my previous post on Suzlon, I had mentioned that I am expecting Suzlon's Market Cap to climb to about Rs.10,000 crores by the end of this fiscal or middle of next calender year. At the end of June'14 quarter, Suzlon's Equity Capital consisted of about 271 crore shares. The company has issued about 34.2 crore shares this quarter including the 7.18 crore shares issued to CDR Lenders & 27.03 crore shares issued to FCCB holders. So the company's Equity Base has already expanded to little over 305 crore shares. At the price of Rs.18/-, Suzlon's Market Cap stands at about Rs.5500 crores, which is not far away from the company's current Fair Valuation.

Now here comes the Real Scary Part: Only about 13% of the FCCBs have been recently converted into shares, which translated into 27.03 crore shares. If the remaining FCCB holders also decide to convert their Bonds into shares, then another 181 crore shares will be issued by Suzlon, further diluting the company's Equity capital. And the scariest part is that all these Bonds will be converted into shares at a price of Rs.15.46/- each and at a Fixed USD rate of Rs.60.225/-. If all these bonds get converted into shares ( and I am sure they will convert at some point if the share price trades at a substantial premium to their conversion price ) then Suzlon's Equity base could be at a touching distance of 500 crore shares. The Equity dilution will be massive and then we can forget the possibility of Suzlon's share price flying away to much higher levels for a considerable amount of time. Every time it goes a bit higher, some of the Bond holders will convert their shares & Sell them to Cash Out.

After considering the possibility of FCCB conversion, I am of the opinion that Suzlon's share price might not go much above Rs.30 level for atleast the next 2 years. Approaching Rs.30/- itself will be very difficult. Other that the FCCB holders, the CDR Lenders are being issued shares at a price of about Rs.18.50/- with a lock-in period of 1 year from the date of issue. Sometime in 2015 even the CDR lenders could think of selling their holding if the share price is trading at a decent premium to their conversion price. One thing is for sure that Suzlon's share is not going to be a Multi-bagger until all these hangovers are eliminated. 

Zicom Electronic Security Systems Ltd - Steady progress continues

If we look at the Trailing-Twelve-Month (TTM) numbers of Zicom Electronic Security Systems Ltd for the last many quarters, the company's growth seems to be going as per a scripted story. With every passing quarter, Zicom's TTM Total Income figure goes up by about Rs.50 crores. And Zicom will be breaking the Rs.1000 crores level at the end of Q2 of this fiscal. This is a big milestone for the company & I am sure that it will not stop here.

The biggest contributor to Zicom's consolidated Total Income is it's Dubai based subsidiary Unisafe Fire Protection Specialists at 45% & contributes 60 to 65% of the Net Profit. Zicom's standalone India business contributes about 35% of Total Income & 20% of the Net Profit. The Qatar based subsidiary (Phoenix International) contributes most of the rest. Zicom's newest baby Zicom SAAS, which was born just a few years ago, is growing rapidly at over 100% Y-o-Y. But it's contribution at the moment is just about 2-3% of Total Income & less than 2% of Net Profit. Zicom SAAS will continue to grow at a fast pace & in another 2-3 years time, it's contribution will become over 10% of the company's Total Income & Net Profit. The importance of Zicom SAAS is that most of it's revenues are recurring in nature & it's profitability, which is currently low, but will increase with increase in scale.

Zicom's India entity, it's subsidiaries in Dubai & Qatar, are growing at a steady pace of about 18-20% Y-o-Y currently. With increasing scale, the growth rates may moderate some what to levels of about 12-15% in the next 4-6 quarters. The younger & smaller subsidiaries like Zicom SAAS will continue to post much faster growth rates. Zicom's consolidated numbers, which are currently growing at about 28-30% Y-o-Y, I am expecting the growth rates to gradually come down to levels closer to 20%. I might be on the conservative side, but I think that a steady & sustainable growth rate of 15-20% is much better to manage when a company reaches a decent size. Anything more will be a bonus. But this growth rate can be achieved without straining it's resources too much or getting into a large debt.

Now coming to the valuation part. Zicom's EPS currently stands at about Rs.24.50/-, which means at the current price of Rs.105/-, Zicom's share is trading at just about 4.3 times, which I think is very very cheap. Atleast the share price has started moving. It was stuck in the under Rs.70 range for quite a long time. I think that if Zicom continues to post growth rates of atleast 15% or higher consistantly in the coming quarters, then we will see the valuations improve considerably over a period of time. For FY'15, we can expect to see Zicom's EPS to reach a level of Rs.28-29/-. Even at a conservative fair valuation of 8-10 times, it's fair price comes to about Rs.230 to 280 range. I am expecting Zicom's share price to bridge this huge gap to quite an extent over the next 3-4 quarters.

Happy Investing!!!

Educomp Solutions Ltd. - Mild signals of recovery evident

Educomp Solutions Ltd announced it's biggest ever quarterly loss at about Rs.344 crores in Q1-FY'15 result. Upfront it's a massively disappointing result. But if one digs deeper, there are clear signs of recovery in Educomp's business and things will be confirmed in Q2 result. Now one will question: What are positive signals? I would say that the answer is in the Segmentwise reporting of it's consolidated numbers. Will you be surprised if I tell you that despite a Total Income figure of Rs.147 crores & a huge reported loss as mentioned above, for the Jun'14 quarter, Educomp Solutions Ltd did have a Net Cash Inflow (i.e. Total Cash Income - Total Cash Expenditure) of Rs.185 crores during the quarter. Read on for all the details.

The School Learning segment is Educomp's most important business, which includes SmartClass, EduReach and new launches like English Mentor. Over the last couple of months, Educomp has been aggressively marketing a new product called Educomp SmartSchool, which I think packages all it's School Learning products like SmartClass, English Mentor, Assessment & School Management system. If one is following Educomp on Twitter, one will know that Educomp has conducted Roadshows in about 20 or more different cities, where they invited principals of private schools for a demonstration of it's SmartSchool product. We could see start of the contracts for the same being signed from the Q2 onwards. For it's existing SmartClass business, Educomp had announced shifting to the BOOT model about 3 or 4 quarters back. Under this model, the revenue recognition from every contract will be spread over the entire contract period. So the numbers will start small & gradually build-up with each passing quarter.

As can be seen, Educomp's revenues from School Learning segment dropped sharply to lows of about Rs.36 crores in Dec'13 quarter, but have started building up over the last 2 quarters. For Jun'14 quarter, the figure stood at Rs.58 crores. Remember that these are revenues that are recognised by the company as per it's accounting policy. But sometimes the Cash Flows from a certain business segment are not commensurate with the revenue recognition numbers. For FY'11, FY'12 & FY'13, Educomp had recognised total revenues of little over Rs.2700 crores from it's School Learning solutions business, but at the same time the company had piled up receivables of nearly Rs.1000 crores, i.e. this is the amount the company had recognised, but did not receive. Some of this gets reflected in Capital Employed numbers, which the company announces segmentwise at the end of each quarter. Capital Employed in a business is the difference between the total Cash Invested/Spent in the business & the total Cash Flows received from the business. The Capital Employed in the School Learning segment for Educomp went up from under Rs.600 crores at the start of FY'11 to nearly Rs.1400 crores at the end of FY'13. This is precisely the biggest reason why Educomp got into Debt trouble.

An analysis of the Capital Employed numbers for the different segments of Educomp's business gives us a better idea of the kind of Cash Flows the company is receiving & helps us understand the fluctuations in the company's quarterly Interest Cost numbers. The following 3 charts shows the Quarterly progress of the Capital Employed numbers for Educomp's 3 important business segments: School Learning, K-12 Schools & Online Supplemental.

As you can see, the Capital Employed number for School Learning segment has dropped for 3 out of the last 4 quarters. From levels of Rs.1460 crores in Jun'13, the number dropped to Rs.1377 crores at Dec'13. This was not a significant drop in 2 quarters, but it was a clear sign that Educomp had started receiving some of it's long pending receivables. During the March'14 quarter, Educomp seems to have spent substantial sum of nearly Rs.600 crores in acquiring hardware & other equipment, which led to the jump in Capital Employed number. This led to a jump in the company's Interest Cost for Jun'14 quarter. For the Jun'14 quarter, the Capital Employed number has dropped by a substantial Rs.108 crores, which is extremely positive and I am hoping that the number continues to drop by more than Rs.50 or 75 crores every quarter. Any significant drop in Capital Employed number helps in reducing the Net Debt of the company, which impacts the Interest Cost of the company in the following quarters. I am hoping to see the Capital Employed number closer to or under Rs.1500 crores by the end of FY'15.

Now lets look at the next most important business segment of Educomp, which is the K-12 schools business. Even for this business, Educomp does have some receivables from certain trusts, with whom Educomp has School-management contracts. Most of the Capital in this business is locked in the Schools that Educomp has started on it's own or is in the process of doing. The Land cost is the biggest cost & substantial capital in locked in it. The company might look at selling a few land parcels, where it has not started any construction of the school. We will know about it in the coming quarters. At the end of Sept'13, the Capital employed was Rs.2126 crores. Since then, over the last 3 quarters, the number has dropped to Rs.1961 crores. That means there has been a Net Cash Received of about Rs.165 crores for Educomp, from this business segment. I am expecting only a gradual drop in the Capital Employed number for this business for this fiscal. The pace of drop will increase in the following fiscals as more & more schools reach the maturity stage.

The Online Supplemental business is one where the company has not had to put in large Capital & the Cash flows have been decent. This is clearly evident from the Capital Employed numbers, which stood at about Rs.204 crores in Jun'12. It saw a big drop in Mar'13 quarter when Educomp sold off it's stake in IndiaCan to Pearson. Since then the numbers have been fluctuating based on the fee payment schedule of the various courses being conducted under this business segment. Educomp has already announced that it has signed a deal to sell it's stake in GateForum to a PE fund. Once this deal is closed there will be some more Cash Inflow and might make this business segment Net Cash positive.

All these developments should help bring down the Net Debt levels of the company by about Rs.500 crores over the next 3-4 quarters. If things do move in that direction, then we could see Investor interest increasing in Educomp in the coming quarters. We will have to monitor the progress on the Quarterly basis. The Progress will happen in small steps, but the direction should be positive. At the current price of about Rs.28 per share, Educomp is trading at a Market Cap of about Rs.350 crores. I am certainly hoping to see the company's Market Cap to increase to over Rs.1000 crores in the next 2-3 quarters and it will certainly happen if things do move in the positive direction as mentioned above. And if they do happen, then FY'16 will be a lot more positive for Educomp & it's shareholders.  

Suzlon Enerygy - Solid recovery signals, profitability still some time away.

I had written about Suzlon Energy's business recovery about six months back (click here for that post), when the company had received it's CDR approval & steps were already under implementation. At that time Suzlon's Market Cap was around Rs.2650 crores. Over the last 6 months, there have been many positive developments for the stock markets, the most important being the formation of the new Government. This alone has helped most indices to rally about 20-25%. Suzlon's Market Cap has surged to about Rs.6200 crores currently, a rise of over 130%. The share price has more than doubled, while it's Equity base has already expanded by about 10%, reasons for which I had mentioned in the previous report.

Now let's look at Suzlon's performance progress. The following charts show the Quarterly progress on a T-T-M basis:

As can be seen from the charts, Suzlon has posted smart recovery over the last 2 quarters. On a Y-o-Y basis, Total Income has imcreased by 17%, EBITDA has turned positive at about Rs.300 crores compared to loss of Rs.1250 crores a year ago and even the Net Loss is down 35% at Rs.3200 crores from Rs.4900 crores a year ago. Apart from the operating performance, one other positive development is that Suzlon's FCCB holders agreed for fresh issue of Bonds to compensate for earlier dues with a further 5 years maturity window. With this development behind it, now the company completely focus on it's operations & asset monetisation.

Coming to expectation of numbers by the fiscal end, Suzlon's strong Order Book of over Rs.42,000 crores gives a lot of confidence. I am expecting Suzlon to end FY'2015 with a Total Income of around Rs.25,000 crores, which is about 20% higher than FY'2014. EBITDA should come in around Rs.1800-2000 crores, translating into an EBITDA margin of about 7-8%. Net Loss should be sharply lower at about Rs.500-800 crores. One big cost for Suzlon is the Interest Cost. Suzlon's valuations will surge when the company shows signs of reduction in Interest Cost. With improved EBITDA & Cash flows, I am expecting Suzlon to start repaying some of it's debt by Q4 of this fiscal, not in the next 2 quarters. There have also been reports of Suzlon looking at selling upto 25% of it's German subsidiary, which frankly I am not in favour of. That stake sale might bring in about Rs.2000-2500 crores, which will bring down the company's debt by about 15%. But I would be more happy if the company focuses on repaying it's debt gradually via operational cash flows.

On the valuations, Suzlon's market cap which stands at about Rs.6200 crores now, had touched over Rs.9000 crores at one point in the last 3 months, when the stock price had crossed the Rs.35 mark. I think Suzlon is at fair valuations currently. If Suzlon's performance over the coming quarters continues on the lines that I am expecting to, then we could see Suzlon's market cap to increase to about Rs.10,000 crores by March'2015. Remember that this market cap increase also includes increase in the company's Equity Capital. From the current price of about Rs.23/-, Suzlon's share price could increase to little over Rs.30/- over the next 3 quarters, which means one can expect returns of about 30-40% from current levels.

Power & Infra companies' stocks are riding the Modi-wave

What a run we have seen, both before the Exit Polls result & after it!! The initial part of the rally was limited to large-cap stocks only. But over the last 2-3 days we have seen several mid-cap & small-cap stocks rally big time, hitting upper circuits regularly. Most of these stocks are from the Infrastructure & Power sectors. Many of these companies have been struggling on the business front over the last few years. Hence their stocks were heavily beaten down, some even to penny stock levels. But it seems now they have got a new lease of life and they are back from the dead. Have a look at the chart below where you can see the sudden jump in stock prices of 4 such companies.

These are just 4 companies here, but I think hundreds of such companies have seen their share prices rally anywhere between 20% to 100% over just the last one week to 10 days. All of them are flying away on HOPE. Yes, even I am hoping for things to improve for our country as a whole, which will give big opportunities for companies from various sectors, especially those that are required from the nation building perspective. But let me warn you, things will not change overnight. It will take atleast 6 to 12 months for things to get moving. There are lot's of things that Modi & his would-be Finance Minister will need to look into before they start planning & implementing things that would give momentum to large projects from Power & Infrastructure sector. Remember that our country is running a huge Deficit Budget. We will have to curtail expenditure on certain non-productive areas and divert that money to areas which will prove to be productive.

In short I just wish to warn everyone that one shouldn't get exuberant and invest blindly into stocks that are flying away. When all this euphoria settles down, things will be compared in terms of actual improvement in performance of companies & their corresponding valuations. Wait for a correction to Invest fresh money. And if one is already invested in any of these 'flying' companies, then do think of booking atleast partial profits and then reinvest during the next correction. You might get the same stuff at 20% or 30% lower prices in some time.

Telecom: Data revenue growing strong, but for how long?

The Jan-Mar'2014 quarter by-far has been the best quarter for all Telecom operators in terms of growth in Data traffic on the wireless networks. Bharti Airtel, Idea Cellular & Reliance Communications announced their respective Quarterly results recently. Bharti Airtel's Data volumes jumped 20% Q-o-Q from 38.9 mn GBs to 46.7 mn GBs, while Idea Cellular's volume jumped 31% Q-o-Q from 20.8 mn GBs to 27.3 mn GBs. RCom continues to be the largest Wireless Data Service provider with volume of 50.25 mn GBs, a growth of 20% compared to 41.84 mn GBs in the previous quarter. Since all these three large operators have experienced their best growth in terms of Gross Data Volumes in the latest quarter gone by, we can safely assume that the same could be the case with the entire industry or atleast most of the operators.

In terms of Revenues from Wireless Data business, all these operators have posted between 10% to 13% Q-o-Q Growth and infact this business is now the sole or the most important growth driver for all operators. Most players are experiencing stagnancy or very low incremental growth in revenues from the traditional voice business. India's monthly data consumption has probably just started it's growth story. Over the last 2 years, the Smartphone penetration has been increasing at a very fast pace. During the same period, the operators have expanded their 3G network coverage, increased the cost of using 2G data service, which has pushed more & more users to upgrade to 3G service. The Data speeds on the 3G networks being much faster, the overall consumption from every such user has started shooting up. As more & more users start using the 3G service, the consumption is going to keep rising.

Going by the information these operators have declared, my estimate says that we Indians could be consuming somewhere about 60 to 70 mn GBs per month currently & generating about Rs.1500 crores in monthly revenues for Wireless Data service providers. Even by conservative estimates, the monthly Data consumption could double over the next 12 months, while the revenues from it could grow somewhere around 70%, i.e. it could be around Rs.2500 crores per month. Now the question is: Who is going to get how much share of this incremental Rs.1000 crores in monthly revenues. My guess is that the operators with the widest 3G coverage in Metro & Category A circles will gain the most. Bharti Airtel, Vodafone, Idea Cellular, RCom, TTSL, Aircel could be the biggest beneficiaries in that order.

But an even bigger question is: What happens when Reliance Jio launches it's 4G service, sometime in the third quarter of this fiscal? Reliance Jio is expected to initially target the Metro circles and several other large cities across the country, where Data consumption is on the higher side. Reliance Jio will not just eat a portion of the incremental Data consumption market, it will even pull a portion of the existing market. Going by the scale of investments that RelJio is doing, I am sure it must be targeting to garner 30% of incremental Data consumption market & about 10% of the existing market over the initial 12-18 months of launch of it's 4G service. RelJio's impending launch is what could be giving nightmares to some of the top bosses of all large telecom companies in India. It is not just the Wireless Data business, RelJio could even be targeting to get a portion of the voice business, riding on the high-capacity internet backbone. RelJio has acquired substantial chunk of 1800 MHz spectrum in 14 circles. There is only one major problem though. Lack of availability of devices running on 4G LTE technology at reasonable prices. But there are millions of Smartphones, Tablets & Laptops across the country that can access Wi-fi signals. So there is one possibility that RelJio could use the 4G LTE network as the backbone and use Wi-fi as the front end technology to acquire customers. They have already committed billions of dollars of investment towards this business and I am sure that their plans will be to grow aggressively right from Day-1.

Times are going to be very exciting in the Telecom space from the Q3 of current fiscal. All the current operators must be getting battle-ready to fight not just the war for Growth, but some of the operators could even be fighting for Survival !!!

Be Cautious of this sudden rally!!!

The Nifty index has rallied from 6220 levels to close to 6520 levels now during the 5 trading days this week. Nifty has not just hit a new all-time high today, it has rallied over 100 points after crossing the previous high. Several large-cap stocks have gained more than 5% today & over 20% in the last 5 days. But what is noteworthy is that despite such huge rally in large-cap stocks, the Advance:Decline ratio is close to 1:1, i.e. the rally is broad-based. Hence this is a warning sign.

I am a bit skeptical of this sudden rally we have seen this week. Since it is focusing on a limited number of sectors & that too only on the large-cap stocks, we need to keep caution while deciding to trade hoping for the rally to continue this way for more days. I think this rally is being driven by foreign money which is here for short trade, not here for longer term. The logic behind this thinking is: As a long term investor, a fund manager would love to buy at lower & lower valuations. He wouldn't suddenly jump into buying in a way that will drive up the prices at such frantic pace. And he wouldn't even jump in when the prices are moving up in this fashion. This kind of movement is generally seen only when short term trading money is driving up or down the prices of only a basket of stocks. Traders are the ones who would love to create euphoria in the market in such a way that others also start jumping in and then they can book their profits.

All I wish to say is that those looking to invest in the stocks, shouldn't buy during this rally. Just wait for some time, things will cool down or stabilise. There is no point in suddenly investing in something which has already appreciated over 20% or 30% in a matter of just 5 days. Traders on the other hand can make a killing in this kind of environment, but it could also burn someone if things cool down as quickly as it has heated up. That's why I would like to caution everyone. 

Yes Bank vs Indusind Bank comparison

I had posted a comparison of Yes Bank & HDFC Bank about a quarter ago. It was mainly because HDFC Bank has always been considered a benchmark for Private sector banks. But there is a huge difference in size of the two banks. HDFC Bank is 4 to 5 times bigger in size because it is more than a decade older than Yes Bank. Now it's time to compare Yes Bank with someone who is of approximately the same size. Eventhough Indusind Bank is also much older than Yes Bank, it got active for good growth only around the time that Yes Bank was born.

I have arranged the 12-Months data for periods ending Dec'09 to Dec'13 for easy comparison for the performance track record of both the Banks over the most recent 4 years. Following are the charts which show easy comparison for Total Income, Interest Expense, EPS and Share price of both Yes Bank & Indusind Bank.

The charts are quite self-explanatory. Indusind Bank was bigger than Yes Bank upto 2009. But Yes Bank has clearly posted faster growth to take a good lead over the last 4 years. By the end of 2013, Yes Bank is now about 20% bigger than Indusind Bank in terms of Total Income. To fund it's faster growth, Yes Bank needed more capital. Yes Bank chose to depend more on Borrowed Capital instead of issuing fresh shares to raise resources. Between Dec'09 & Dec'13, Yes Bank issued about 6 crore fresh shares, while Indusind Bank's Equity Capital expanded by 11.4 crore shares. The result being Indusind Bank's Interest Cost being about 53% of the Bank's Total Income, while the same being 62% for Yes Bank. Despite this higher % of Interest Cost, Yes Bank has managed to post a Net Profit margin which is on-par with Indusind Bank at about 13.7%.

Coming to EPS comparison, Yes Bank's EPS has always lead Indusind Bank, primarily because of the former's smaller Equity Capital. But just look at the difference in EPS of the two Banks & then compare the same with the difference in their respective Share Prices. While Yes Bank's EPS has reached the level of above Rs.42, about 70% higher than Indusind Bank's EPS of Rs.25. Despite this massive lead in Yes Bank's EPS & superior growth performance, Yes Bank's Share price currently trails Indusind Bank's share price by over 20%. While Yes Bank's share price is currently around Rs.305 compared to Indusind Bank's price at about Rs.400/-. One reason for Yes Bank losing some portion of it's valuation is because of the quarrel between families of the founding partners. As soon as the quarrel hit news headlines, Yes Bank's share price started it's downward movement. But the thing is that the issue could get resolved anytime soon and it has not had any impact on Yes Bank's performance as can been seen from the Bank's consistant performance over the last 4 quarters. Sooner or later FIIs and other large funds will realise this and Yes Bank could come back to the valuations that it used to command about a year ago.

My point is: If Yes Bank continues to post growth in line with the Industry's growth or marginally better than that, then it should be commanding valuations in line with other Private Sector Banks.

(P.S.: One reason why Indusind Bank has enjoyed better valuation than Yes Bank could be it's inclusion in Nifty index. Despite Yes Bank being bigger than Indusind Bank, the latter was chosen to be included in the Nifty to represent young modern private sector banks. Maybe the age of listing on the stock exchanges is one criteria to decide on inclusion in the Nifty index.)

Educomp Solutions - Quick turnaround underway!!

Most people following Educomp Solutions Ltd had considered the company to going for History Books after seeing the Q2-FY'14 results, which were very very disappointing to say the least. Educomp posted the lowest quarterly revenues in more than 3 years and posted a Net Loss which was close to 50% of the company's Total Income for the quarter. Things were going from bad to worse. It seemed like Educomp did not even have enough cash to take care of it's everyday existing operations, forget about going for more business. There were reports that the company had not paid salaries to thousands of employees and even their Provident Fund payments were delayed for more than 4-5 months. From Q2 results, it was obvious that 3 out of Educomp's 4 business segments were struggling. The SmartClass business, which was the company's main contributor had virtually come to a standstill with revenues collapsing over 70% Y-o-Y. The Higher Learning Solutions business' contribution too had dropped nearly 75%, but it was small in any case. The K-12 Schools business, which was expected to give Educomp long term stability with steady moderate growth, too posted nearly 25-30% Y-o-Y drop for Q1 & Q2. The only business which managed to post decent 2-digit growth was the Online Supplemental segment, whose contribution increased to nearly 47% of Educomp's Total Income.

TTM Total Income Progress (Segmentwise)

As you can see from the charts above, Educomp's School Learning Solutions (SLS) business, which was contributing over Rs.1000 crores on a 12-months basis until about June'12, has seen it's revenues slide rapidly over the last 6 quarters and now stands at about Rs.350 crores. In these 6 quarters, the contribution of SLS to Educomp's consolidated Income has dropped from a whopping 69% to still reasonable 40%. But going by the last couple of quarters performance, it is expected to further drop to about 25%, before it starts picking up again on the currently underway restructuring. The business segment which has shown the biggest increase in contribution is the Online Supplemental business. It's contribution on 12-months basis has increased from 15% to 37% from June'12 to December'13 and will soon overtake SLS to become the biggest contributor to Educomp's Income, atleast temporarily.

The most important business for Educomp in terms of the biggest Capital Employment is the K-12 Schools business. The Total Capital Employed (TCE) in this business is over Rs.2000 crores, more than 50% of Educomp's TCE in all it's business segments. I have written about Educomp's K-12 business & it's ultimate importance to the company's long term future, in my report a few months back. (Click here for that report) The K-12 business, which is run via one of Educomp's subsidiary, too was struggling to meet it's debt repayment obligations & needed some restructuring in repayment terms. It's CDR proposal was approved and implemented during Q3-FY'14. Total loans worth about Rs.750 crores have been rescheduled for repayment over a 12 year duration. Plus the consortium of Banks even approved some working capital to the company to help it continue investing in it's existing operations. The revenues from K-12 business bounced back in Q3 with an 8% Y-o-Y growth after reporting a drop of between 25 to 30% in the previous 2 quarters. The revenues from this business are expected to get back to the 20%+ growth trajectory in the next fiscal, especially from the new Academic year.

TTM EBITDA progress

The EBITDA performance of Educomp's all 4 business segments will give you the true idea of the company's state of affairs. On one hand, the K-12 business' profitability has increased rapidly and is expected to remain high, thanks to the reasons I have already explained in my report. The Online Supplemental business too is rapidly getting into the black at the EBITDA level. Infact this business could get to posting small Net Profit as well in FY'15. The TCE involved in the Online Supplemental business is very small at less than Rs.100 crores and hence there is not much Debt or CAPEX associated with this business. Hence it could very easily start posting a Net Profit in the coming few quarters. The Higher Learning Solutions business, which is very insignificant for Educomp, is also trying to get into the black.

The biggest dampener to Educomp's fortunes in the last 18 months has been the SmartClass business, which is part of the SLS business. It's profitability has just collapsed since Sept'11, when the company tried to super-charge it's business growth by putting immense pressure on the company's balance-sheet and things did not go as smooth as expected. Between June'11 and June'13, the TCE in Educomp's SLS business doubled from Rs.735 crores to Rs.1460 crores, that means nearly Rs.700 crores of revenues during this period that the company had booked, did not translate into actual Cash Flows. As per my estimates, most of this money is still locked with the Banks, which were part of the tri-partite agreement during the days when Educomp was doing SmartCLass implementation via it's vendor EduSmart. I have no idea if the Banks are ever going to release those funds or else the company will atleast get the annuity revenues which are being paid by the Schools to EduSmart. There has been some beginning of recovery of Cash stuck in this business, which is reflected in the drop in Rs.83 crores of TCE from Rs.1460 crores to Rs.1377 crores. Hopefully this will continue in the coming quarters as well, which will help improve Educomp's Cash position and also help it restart it's SmartClass implementations, which are currently at a virtual standstill. Hopefully the Banks which are also looking into a CDR proposal for Educomp Solutions Ltd, will be encouraged with this development.

Finally, I have a feeling that all the CDR related stuff should get sorted out latest by March'2014 and Educomp should be able to restart it's growth engine, though at a much more moderate pace, from Q1 or Q2 of FY'15. Whatever be it, I am sure that Educomp's management will look at bringing down the TCE of the company from the current level of close to Rs.4000 crores to something like Rs.2000 crores over the next 3-4 years. For that to happen, Educomp's growth should be less Capital intensive and more Cash Flow generating. I think that is very much possible. Until the point I see signs of those things happenning, my fingers are crossed with lots of optimism in my mind.

Suzlon's Q3 performance - recovery has started

Suzlon Energy Ltd posted not-so-bad numbers for Q3-FY'14. It's Total Income came in at Rs.5063 crores, 24% higher Y-o-Y, while it's EBITDA Loss was Rs.126 crores, 60% lower Y-o-Y. Even though Suzlon posted a loss at EBITDA level as well as Net Level during Q3-FY'14, it's mainly due to three reasons: the clean-up that the company is undertaking of it's potentially irrecoverable bad debts, restructuring of it's operations by reducing it's workforce & working capital requirement and Foreign currency fluctuation losses. Had it not been for these 3 reasons, Suzlon would have posted EBITDA profits during Q2 & Q3 of this fiscal.

This clean-up & restructuring is expected to continue for another couple of quarters. Hence we could see the company posting some decent EBITDA numbers only in the new fiscal. What is more heartening to note is the improvement in the company's order execution, which is has just started picking up pace. It is still to get back to normal levels, but it is on the right track. On one hand the order execution has started improving, while on the other hand the flow of fresh orders has also been very good. Suzlon received fresh orders worth around Rs.8300 crores during Q3, which has further increased it's Order book position to around Rs.45,000 crores, giving it very strong visibility.

Suzlon's Trailing-Twelve-Months Results summary

As you can see, Suzlon's T-T-M Total Income chart has started showing an uptrend after Q3. The EBITDA chart had started improving after Q2. Eventhough the improvements in EBITDA & Net Loss are only marginal currently, it's mainly due to the various right-offs that the company is currently undertaking to clean-up it's operations. Things will start improving at a faster pace once all this clean-up is over.

Another positive point in Suzlon's recent results is the reduction in Total Capital Employed (TCE) of the company on the Consolidated basis. As the name suggests, Total Capital Employed is nothing but Total Money Invested or Spent in the business - Total Money recovered from the business. An increase in TCE indicates that either the company is undertaking CAPEX to increase it's capacity or it is not receiving Cash-flow commensurate to the Revenues it is booking during the period. On the other hand, a reduction in TCE means the company has received more Cash than the revenues it had booked during the period (i.e. dues from previous periods) or it has sold some assets.

At the end of December'2012, Suzlon TCE on a Consolidated basis was Rs.17,038 crores, which reduced to Rs.15,877 crores at the end of September'2013 and further reduced to Rs.15,610 crores at the end of December'2013. That means during the last one year Suzlon has received Rs.1,428 crores either via assets sale or recovery of previous dues from customers. This inflow of Capital will help the company improve it's Cash positions & also help reduce it's Net Debt position, which will ultimately help the company in controlling it's Interest Costs. Most of this Capital will come in handy as Suzlon tries to ramp up it's manufacturing to fulfill it's order book.

Suzlon's share price is currently hovering around the Rs.10-11 range, translating into a Market Cap of about Rs.2500 to 2700 crores on the Equity base at the end of December'2013. This Equity Base will expand further in the coming months as the commitments made in the CDR agreement are implemented. FY'2015 should be much more positive for Suzlon on the results front, compared to FY'2014, as most of the clean-up and restructuring costs must have been taken care of during the current fiscal. Suzlon is expected to post healthy EBITDA margins of close to 10% during FY'2015 and should be very close to break-even on the Net Level as well. Once those signs start showing, Suzlon will command much higher valuations than current level.