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.