While many of us are familiar with Zicom Electronic Security Systems Limited as a leading Electronic Security Surveillance company in India, in reality it should be seen as provider of fire monitoring solutions in the Middle East. Around 60% of its revenue comes from fire monitoring solutions while only around 30% percent comes from CCTV-camera surveillance security. On the security side of the business the hardware business is dominant.To understand the business better the overall corporate structure is explained as below
- Zicom Electronic Security Systems Limited, the parent company focusses on
- Distribution of electronic security products targeting SME and SOHO
- Project solutions where Zicom is the system integrator focused on requirements of governmental agencies, enterprises
- The stand alone entity contributes to around 30% of the revenue of the overall group and is a low margin and highly competitive business
- Electronic Security as a Service (E-SaaS) provided by its subsidiary Zicom SaaS Pvt Ltd
- Its a small yet one the fastest growing part of the overall business with superior margins as compared to the main security business.
- It has grown from a Rs 33 crore business in FY 15, expected to reach Rs 50 crore this year and the management expecting it to scale up to Rs 70-85 crore in FY17
- It could drive earning growth for the company
- Fire monitoring and protection of Unisafe Fire Protection Specialists LLC, Dubai and Phoenix International WLL, Qatar
- It contributes around 60% of the overall revenue
- It could be negatively impacted by a regional slowdown on account of volatility in crude oil; prices.
- Other business which are not considered materially significant to the overall business in the near future
- Unisafe Fire Protection Specialists Singapore Pte. Ltd., Singapore
- Zicom Security Projects Pte. Ltd., Singapore
- Unisafe Fire Protection Specialists India Pvt. Ltd.
Over the long term ignoring the quarter on quarter volatility we don’t expect any significant changes from the electronic security products business of the parent company and the fire monitoring business in the Middle East. We expect Zicom to ride the wave for increased demand for security solutions reflecting the troubled times we live in. We do not expected any differentiated outcomes relative to their end user industry performance from these two segments which contribute to close to 90% of the overall business.
We are looking forward to the higher growth rates and the superior margins of the E-SaaS business to drive earnings growth. Given that E-SaaS will contribute to around 10% of the overall business in the near future, its impact on the overall business will be limited.
Additionally, debt reduction could also drive significant earnings growth by reducing interest costs. However, we don’t know what the company is doing to drive down debt. It appears as if the company is quite comfortable with the level of debt it currently carries. Hence we are not factoring the outcomes of debt reduction in our view of the stock.
So do we buy the stock?
The low PE of around 4-5 makes us look at Zicom again and again. A good entry point during times of market panic along with the patience to wait it out till the market is ready to look at it with a higher PE could help you make money. Unless of course some corporate action drives debt reduction across the businesses makes the company more valuable.
Where is the margin of safety?
The stock is available at a PE of 4-5 with a Price/ Book Value of less than 1 which provides some comfort. However, the level of debt is quite high with a Debt/Equity ratio of more than 1. The high debt levels makes the company quite expensive on an EV/EBIDTA basis. EV/EBIDTA for Zicom is more than 5.