Platinum available at the price of Silver

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

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

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

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

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

Happy Investing !!!

TTML - Clean-up over, Going for Growth

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

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

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

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

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

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