Zicom Electronic Security Systems Ltd. - Excellent time to Buy.

I have been recommending a (Purely) Long Term Investment in Zicom Electronic Security Systems Ltd. since November'2013, when the share price was trading in the under Rs.70 range. Following are the links to the posts I have made on this company in the last 18 months:

1. Platinum available at the price of Silver - 8th November'2013.

2. Zicom Electronic Security Systems Ltd - Steady progress continues - 15th Aug'2014.
3. Zicom Electronic Security Systems Ltd. - Valuations have finally started moving !!! - 14th November'2014.

( Click here for Zicom's Easy Results Summary page. )

In each of these previous reports, I have been highlighting that Zicom is best suited only for patient Long Term Investors. On the business front it has been growing at a steady but healthy pace. At the end of Dec'14, it's T-T-M Total Income stood at Rs.1085 crores, EBITDA at Rs.135 crores and Net Profit at Rs.46.3 crores. It's EPS stood at Rs.26.30/-. During the March'2015 quarter, Zicom has issued a total of 26 lakh warrants to Promoters & Dubash family (related to Godrej family), which carry a conversion price of Rs.160/- per share. Once these warrants get converted into normal Equity shares, the corresponsing EPS will get diluted by about 15-16%, but it will also boost the company's Book Value substantially. And the extra capital will help reduce the company's dependence on Borrowed money for Working Capital or CAPEX needs. Banks too will be more co-operative as Dubash family is now part of the large shareholders of Zicom.

After spending a few months in the Rs.100-120/- zone, Zicom's stock had rallied to hit a new high of around Rs.190/- in Jan-Feb'15 period. But the stock has now seen a healthy correction to levels of around Rs.140/- and I think is again an excellent opportunity for Long Term Investors to buy shares of this company, with atleast a 2-3 years view. I am expecting Zicom to grow at over 15% Y-o-Y comfortably over the next 2-3 years and hence I strongly believe that the stock can continue to get re-rated upwards towards a P/E ratio of closer to 10 during this period. At the current price of Rs.140/-, it trades at just about 5-6 times it's T-T-M EPS. Over the next 2-3 years, the stock can easily double or more. The only problem being the stock does have the tendency to test it's investor's patience for considerable amounts of time. Ideally one should buy the stock & not watch the prices on weekly or monthly basis. Just monitor it's Quarterly results to ensure that the performance is decent and sit tight. The returns will come. Just remember to buy in small quantities at a time. The trading volumes in this scrip are generally very low.

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.