Zicom Electronic Security Systems, incorporated in 1995, is a leading electronic security solutions (ESS) provider and system integrator in India. It offers a wide range of products including access control systems (using keypad, proximity card and bio-metrics), CCTV surveillance (including remote video surveillance), fire alarm systems, intrusion detection systems, smart cards, perimeter protection systems, law enforcement products, etc. The company has entered into strategic alliances with global leaders to source security equipments. Its customers include several large Indian and multinational companies in the field of infotech, telecom, media, banking, finance, industrial, etc as well as various public sector units. It currently employs 160 people and has presence in 12 cities.
Mr. Pramod Rao is a Promoter and Managing Director of the company. He is a science graduate, has over 19 years of marketing experience in various conceptual product categories like beverage vending machines, packaging items, electronic communication equipments and electronic security systems. He looks after the day to day affairs of the company and is responsible for identifying strategic international business partners, strategy planning, overall marketing and sales functions.
In an exclusive interview with Mr Anil Mascarenhas and Rajiv Mehta of India Infoline, Mr Pramod Rao briefed about the industry, growth drivers, business model and strategies the company would follow to tap the expected growth. He says,"We expect our topline to grow by about 30% in the coming years and would maintain the current profitability".
Could you just brief about the evolution of the industry in India and the company as well as highlight the changes taken place?
Till the year 1995 security system business was almost non existent and the players consisted of owner and promoter driven companies. Zicom was the first company to enter this business in the organized market. In the first three years of the company?s operation, the business scenario was not favorable plagued by the issues such as Affordability, Acceptability, Accessibility and Awareness of the electronic security systems. At that time the main buyers of these systems were foreign MNC?s like Coke, Pepsi, etc. Post September 11 attack on Twin Towers and December 13 attack on Indian Parliament, the security systems market has undergone a sea change. The perception towards security has changed since then from being a luxury and uncalled for to being a need of the day.
What is the global and domestic market size for electronic security systems? At what rate is the market expected to grow in the coming years?
Currently India and China are the fastest growing market for the security systems growing at the rate of 30%, whereas the world market, which is mature, is growing at the lower rate of 10-12%. The global industry size (electronic security system) at present is US$60bn and the Indian industry size is estimated to about Rs3.75bn. The Indian market is expected to reach Rs10bn by 2007. The above estimated figure is excluding the defense purchases, which is a critical segment having great potential for growth.
What is the company?s present market share and the same targeted for the coming years?
The Indian market of Rs375cr is divided into organized (Rs175cr) and unorganized (Rs200cr) market. We being an organized player command a share of ~23% (Rs40cr) in it. The market can be expressed in the form of pyramid consisting of three levels. The lowest level consists of retail & home and represents a market of Rs200cr. The company doest not have presence in this segment and the main players are the owner driven companies. It is a price driven market rather than a value (quality) driven one. The middle level is the corporate level consisting of multiplexes, shopping malls, IT & BPO companies and corporate offices. This is the space where Zicom operates. The top end of the pyramid comprises of projects from Government where the business comes from sectors such as power, oil & natural gas, aviation, financial institutions and government establishments.
What are you doing to tap the huge retail and residential pie?
We studied the market and have initiated presence with the intention of being a value leader and not a price leader. In case of Indian homes and retail chains, investment in security systems is a big issue with people being deterrent to chalk out big sum. So we have come out with the concept of Z-Security, where we give our products to retail and residential customers on monthly service basis. The charges are Rs777 pm for a burglar alarm system and Rs3950 for a CCTV system. In this case, the customer doest not feel the pinch of paying lump sum at one time but rather treats it as a routine monthly expense like electricity, telephone, etc. The response has been especially good from banks, shopping malls and food chain shops.
Who are the main competitors and how do you differentiate from them?
Our main competitors consist the mix of Indian and MNC companies. Some of the MNC competitors are Seimens, Honeywell, Johnson Control, Gunebo and Tyco. The Indian competitors can be further segregated into Government companies such as ECIL, BEL and SCI (semiconductors) and private companies such as Dats, Datamatics, etc. Most of these companies operate this ESS business as a division whereas for Zicom its our 100 % focus area.
The company is said to have made a shift from product based to project based business model. Could you elaborate on this issue?
A couple of years before we were concentrating only on private projects but after terrorist event taking place the Government market has opened up. To capitalize on this opportunity, we formed a strategic business group focusing mainly on large projects.
What is the percentage share of the Government and PSU business in the total revenues and where do you see it heading?
Earlier all the revenues were coming from the corporate market but currently 20% of it comes from the Government and PSU segment. We expect its share to further increase in future considering the untapped potential for growth.
The company?s strategy of focussing on Government and PSU segments have boosted topline but squeezed margin. Could you comment on the same?
Unfortunately, as the government projects participation takes place through the tender system, the lowest cost bidder wins the project. Therefore the business is done on the lower margin and acts as a drag on the overall margins. However, huge volumes garnered from these large projects more than compensates the lower margin.
Since you compete with Government companies like ECIL, BEL etc what has been your success rate in winning large Government contracts?
We have won quite a few large government projects. We have executed large projects for Reserve Bank of India, Bureau of Civil Aviation, Bhabha Atomic Research Centre and National Thermal Power Corporation. To further enhance our win rate, we have entered into strategic alliance with Bharat Electricals Ltd (BEL), a company partially owned by Ministry of Defense. BEL will be at the front end biding for contracts whereas we will act as a partner sharing the work won by them.
The company sources critical technologies and equipments from world leaders. Doesn?t this involve the risk of being too dependent on them or competitors sourcing the same technology?
We do not see any risk of being too dependent on them, as there are other global companies who are ready to supply the same equipments to us. Also the risk of hike in prices is impractical in this industry as the prices of electronics move only in one way ie downwards. We have also been consciously building our brand in recent years, which has helped the customers to identify with us.
Do you file IP?s for the systems you make? Could you share details about the new systems or products in pipeline?
We file IP?s for the basis system we make, which is worked upon to suit the client?s requirement. We also keep on filing revised IP?s for the upgraded system. As of today, we hold IP?s for access controller, access software and some smart card softwares. Currently we are working on the RFID technology especially for library management and Vehicle (car parking) management.
Could you give more information on company?s new initiative like Zi-GSM?
The Zi-GSM is a part of the smart home technology where automation can be used on daily basis. Through this technology one can control electricity, electrical appliances, security, etc from a remote area. We are expecting a great response from the home segment and are mainly targeting the retail market for this service.
Could you share details on the company?s global expansion and acquisition plans?
As far as global expansion is concerned, we are looking at a different type of partnership altogether. We would like to enter new geographies by having a local partner. We would help them in reducing their cost of operations by supplying high quality engineers and in return we will have access to the host country?s market.
What has been the trends in share from system integration (product installation) and services (AMC, counseling, etc)? What is the individual operating margin for the same?
The integration business globally is highly competitive and fraught with relatively lower margins. So to derisk our business, we have come out with services such as Z-Security , which has the potential of generating immense recurring revenues.
Your performance in Q1 FY05 has been unsatisfactory with revenues and profit declining sequentially and registering a marginal rise on annual basis. What were the factors affecting the performance?
The first quarter every year have always been a relatively bad one as the business environment is dull followed by hectic business activity in the fourth quarter. We expect to perform very well in the third and the fourth quarters of the year.
The company?s operating margin has been witnessing a chequered movement. What is your margin outlook for the coming quarters as well as for the full year FY05?
The operating margin in FY04 was lower at 15% as compared to 17% in FY03 as the Government business that was not present in the earlier year contributed 20% in FY04. We would continue to maintain healthy operating margins for the coming quarters aided by increasing share from service revenues.
The debtor days and inventory days have risen over the years and stood at 125 and 65 at the end of FY04 respectively. Could you elaborate on the reason for the same along with the outlook?
The increase in the debtor days is directly attributable to the increase in share of government business. Since the order values are large and the collection cycle are longer in this business, the debtor days will continue to remain high. The higher inventory at the end of the year was due to an unrealized job in the fourth quarter of the year.
What is the planned capital expenditure for FY05?
There is no planned capital expenditure for the current year.
What are your plans regarding increasing the headcount? What is the attrition level and is the company planning any salary hike?
Our current headcount stands at 160 employees. At the end of the year, we expect this figure to reach around 200. We witnessed high attrition recently on account of restructuring process, where in we hired fresh talent and weeded out some the non performers. However, the attrition levels are not as high as witnessed by the plain vanilla software companies. The company implemented a salary hike in the month of June and then extent of hike was 10 ~20%.
What is the company?s order book position?
The order book position stands at Rs750-800mn.
What could be the major concerns that can hinder the company?s progress?
One of the major concerns the company faces today is the lack of trained and quality manpower. Due to this, the company has to incur additional cost on training and development of employees.
What will be your earnings guidance for FY05 and FY06 and what will be the drivers for the same?
We expect the topline to increase by atleat 30% in the current year and would like to maintain the current profitability. Going ahead, we would like to maintain the growth momentum.
Any message for the shareholders?
The electronic security systems business has a long way to go considering its latent potential, rising awareness and changing perception towards security. The company is the leader and would strive to maintain its dominant position in the industry and at the same time would reward all the stakeholders handsomely.