The growing demand for security by large corporations and retail establishments across India is spurring investor attention in the security services industry, one of the country's fastest growing.
As a number of companies that offer trained guards, cash storage and transportation as well as electronic surveillance raise risk capital and prepare to buy out smaller players, there is a wave of consolidation that is expected to change a hitherto fragmented industry, which is estimated to employ some 50 lakh.
"The security services industry is reaching an inflection point," said Rituraj Sinha, group chief operating officer of SIS. The 33-year-old, who was earlier a Londonbased banker, took over the reins of the company in 2002.
"Institutional investors believe that they can actually get handsome returns (in security services), instead of just getting back their capital which is the case so often in India," said Sinha, whose company raised Rs 500 crore earlier this year from private equity fund CX Partners. A combination of private equity investments and entry of foreign players is already providing a more organised avatar to this industry currently valued at Rs 23,000 crore.
Experts said the rising interest in the industry, which is broadly divided into segments ranging from manpower and guarding to cash logistics and electronic security, is based on expectations that its size will nearly double to Rs 40,000 crore by fiscal 2015. At present, the organised sector accounts for about 30% of the market. "We are definitely going to see a lot more consolidation," said Amitabh Jhingan, partner of transaction advisory services at EY. "This will be driven by two factors: the entry of global players and demand for companies with a national presence."
Delhi-based SIS has provided security for Tata group employees during the company's pull-out from the disputed site at Singur in West Bengal in 2008. SIS also provided manpower guarding services to automobile manufacturer Maruti at its plant in Manesar following rising tensions between the company's management and its workers.
"We would not have invested unless we anticipated internal returns on investment of about 25%," said Ajay Relan, managing partner of CX Partners, an investor in SIS. CX Partners' investment in SIS provided the company's previous investor DE Shaw with a lucrative exit.
In Mumbai, Topsgrup, one of the largest security services providers in India—it is promoted by 42-year-old Diwan Rahul Nanda—has mandated merchant bank NM Rothschild to scout for fresh investors. A deal will see current investors Rakesh Jhunjhunwala, ICICI Ventures and Everstone Capital, who together own about 38% of the company, exit the firm.
While manpower guarding dominates the space, cash logistics and electronic security are also fast-growing services. "In the cash logistics space, all operators carry up to Rs 15,000 crore per day, and up to Rs 5,000 crore in their vaults. Therefore, there is no doubt that we have reached scale," said R Venkatesh, chief strategy officer at CMS Info Systems, which runs a cash logistics arm, CMS Securitas. Private equity major Blackstone owns a majority stake in CMS.
Such huge scale and the availability ofprivate equity money have triggered an appetite for acquisitions.
"This is a volume-based business and we are on the lookout for businesses that we feel will have synergy with our existing operations and will be a good business fit," said SIS's Sinha. His company earned revenue of Rs 2,770 crore in fiscal 2013. Five years ago, its topline was Rs 147 crore. The entry of global players keen to buy out local firms is also seen as a boost to greater liquidity in the market. In 2010, International Service System, the world's largest facilities management firm, acquired 49% of Chennai-based SDB Cisco, the maximum allowed under current policy, while the Indian arm of UK-based G4S bought real estate group DLF's security firm TerraForce.
Since then, some of the world's largest facilities service providers have started operations in India, either through joint ventures or through outright buyouts. "Indian private security services sector is a sunrise sector. The good thing is it has a direct link to consumption, and is quite recession-proof," EY's Jhingan said. What should lure potential investors even more is that last month a committee headed by Arvind Mayaram, secretary at the department of economic affairs, recommended that 100% foreign direct investment be allowed in the country's private security sector.
"As we move forward, we realise the pressing need for more informed guidelines, which is critical to drive structured growth," said CMS' Venkatesh. A number of companies have also come together to form the Cash Logistics Association, and have been in talks with theReserve Bank of India to introduce a stronger regulatory framework. "The old Chinese saying that there are interesting times ahead, holds true for the sector," said Sinha.