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.