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SIS will continue to deliver over 20% return on equity: Rituraj Sinha

On an average, SIS has added 1,800 new jobs each month between April and October 2019. That gives us a run rate of over 20,000-25,000 new hires for the full year. I do not see any material reason for the trend witnessed in the first nine months to change. A very recession resistant demand is demonstrated q-o-q.

Last Updated: Dec 12, 2019, 01.44 PM IST|Original: Dec 12, 2019, 01.17 PM IST
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Essential services will move into essential solutions category. Our major consumers like banks, auto, IT or even the more traditional sectors are seeing demand returning. Decisions are being taken or looks like will be taken in the next three to six months. So, the broad parameters that SIS has indicated for the market in the past, are still being maintained, says Rituraj Sinha, Group MD, SIS. Excerpts from an interview with ETNOW.

At a time when there is excruciating pain in the job market, you have said that you would be hiring 30,000 people across the country next year. Where is this optimism coming from?
You have to consider the nature of our services business. It is completely domestic focussed and completely in the category of essential services. Even if economic cycles are not peaking, people tend to use their facility management services because you cannot do away with hygiene or security guards or CCTV cameras even in a downturn. It is a very recession resistant demand that has been demonstrated quarter-on-quarter over the last 12 quarters since we listed and more so in the last three, four quarters.

As regards the jobs, between April and October 2019, on an average, SIS has added 1,800 new jobs each month. That gives us a run rate of over 20,000-25,000 new hires for the full year. I do not see any material reason for the trend witnessed in the first nine months to change.

Is artificial intelligence (AI) a potential threat to the kind of essential services which you are providing?
It depends on how you look at it. We look at it as an opportunity, not a threat. We have been deploying CCTV cameras for the longest time and we used to have control rooms where people would sit and watch thousands of hours of live footage; that is completely replaced now. There is a video analytic software. Nobody is watching thousands of ATMs on e-surveillance every minute of the day. We are using video analytics backed by AI and even some ML (machine learning) to address that. You are absolutely right. technology will play a big part and essential services will move hopefully into the essential solutions category.

The large difference between services and solutions being that services are manpower intensive whereas solutions are optimising use of manpower but using greater degree of technology. So, that is already happening and SIS has been a market and thought leader and we do not see technology intervention to be a risk. We actually see it as a great differentiator that allows us to establish SIS proposition versus our competitors.

What are we looking at going forward? Are we looking at a three-four times leap in revenue in the next five years in Cash Logistics vertical?
At SIS, we broadly maintain a guidance that we will continue to deliver 20% year-on-year growth or greater than 20% return on equity and a 50% OCF to EBITDA. That is what we have done in the last 12 quarters since listing. There is nothing for me to change that and if you extrapolate that number, I am sure you can do that for yourself. I am not here to give you a five-year forecast. What we can talk about is the order pipeline. The macro environment is improving versus the first half of the year basis rather than going from bad to worse.

Our major consumers like banks, auto, IT or even the more traditional sectors are seeing demand returning. Decisions are being taken or looks like will be taken in the next three to six months. So, the broad parameters that SIS has indicated for the market in the past, are being maintained.

Would this be across segments like security and cash logistics and the global markets as well?
40% of our revenues comes from security solutions in India. Another 15-20% comes from facility management solutions in India and the remainder comes from SIS international operations, which is roughly 40%. Cash Logistics does not get consolidated reporting because we have a minority holding in the cash joint venture. These numbers are primarily for security FM and the international security piece.

As regards Cash Logistics, we have seen a tremendous amount of intervention in terms of RBI guidelines for minimum standards in cash logistics operations. Then came the ministry of home affairs guidelines for solidifying security standards and risk mitigation in cash logistics operations. These are very, very right because cash logistics companies have 11,000 odd cash vans but as an industry, we carry more than Rs 15,000 crore of currency each day for the banking segment. Banks do not own cash vans. The physical currency management is completely outsourced. There was a need for these regulations, they have come about in the last year and a half. We are in the process of determining the new price points for the banking sector. Hopefully, this should smoothen out in the next three to six months.

How are your deals structured? Do they account for inflation which kicks in every year? How often do you have to renegotiate your contracts and where do you see contract pricing is headed?
Every single one of our 15,000 plus contracts, irrespective of the customer segment and size, are based on a cost plus pricing model. They have direct linkage to the prevailing minimum wage at that point in time and they have auto escalation. We do not actually go back to clients and renegotiate each time the minimum wage changes. You have to understand that India has got 30 states and they continue to alter the minimum rate of pay every six months. There are too many instances of this happening in India.

Many years ago, the industry moved to a platform where all our contracts are built on pro rata price change. The minimum wage changes or provident fund rate changes or ESI rate changes or any statutory change for that matter, are pro rata passed through to the end users. What we get is a percentage service charge on the cost.

If the minimum wage is Rs 100, we get a percentage on that. If it becomes Rs 102 next month, we would continue to take a percentage of that and that is an auto escalation. We do not go back to 15,000 customers and renegotiate every six months.

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