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Kapston Services Ltd Management Discussions

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Jul 18, 2024|03:32:06 PM

Kapston Services Ltd Share Price Management Discussions

Global Economy

The global economy has seen a slow down, according to the baseline forecast, growth is expected to decline from 3.4 per cent in 2022 to 2.8 per cent in 2023 before stabilizing at 3.0 per cent in 2024. Advanced economies are projected to experience a notable slowdown in growth, dropping from 2.7 per cent in 2022 to 1.3 per cent in 2023. In an alternative scenario involving additional financial sector stress, global growth is anticipated to decline to around 2.5 per cent in 2023, with advanced economies seeing growth rates below 1 per cent.

In the baseline projection, global headline inflation is predicted to decrease from 8.7 per cent in 2022 to 7.0 per cent in 2023, mainly due to lower commodity prices. However, underlying (core) inflation is expected to decline at a slower pace. In most cases, inflation is unlikely to return to the target before 2025.

Global trade continues to face pressures stemming from geopolitical tensions, weakening global demand, and stricter monetary and fiscal policies. The volume of global trade in goods and services is forecasted to grow by 2.3 per cent in 2023, which is significantly below the pre-pandemic trend.

The Challenges presented by global economic outlook are to be addressed diligently by controlling higher inflation and bringing global economy back on higher growth path.

However, Asian economies continue to do better than the global economy.

Indian Economy

In 2023, Indias GDP has reached an impressive $3.75 trillion, a significant increase from approximately $2 trillion in 2014. This remarkable growth has propelled India from being the 10th largest economy in the world to now occupying the 5th spot. India is widely recognized as a Bright Spot in the global economy.

The overall growth of the Indian economy remains robust. The real GDP has experienced an year-on-year growth of 7.2 per cent during the fiscal year 2022-23. This strong momentum has driven the Indian economy to reach $3.3 trillion, setting the stage for achieving the ambitious target of $5 trillion in the coming years.

Industry structure and developments

Staffing Services

The staffing services market in India is experiencing a remarkable growth rate of 14% year-on-year. It is poised to become one of the largest industries by 2030. The demand for contract staffing services primarily came from sectors such as FMCG, E-commerce, Manufacturing, Healthcare, Retail, Logistics, Banking, and Energy.

However, the IT staffing sector experienced a gradual slowdown in new employment creation starting from Q3 2022-23. This had a significant impact on the overall net employment growth in the staffing industry for that period. Factors contributing to this slowdown include ongoing geopolitical tensions, the impact of the Russia-Ukraine war, and turmoil in US financial markets. The IT industry initiated rightsizing efforts since the second half of the year, leading to caution in new employment generation across multiple sectors. The IT contract staffing industry, in particular, witnessed a sharp drop of -7.7% year-on-year.

The staffing industry as a whole is gradually adopting data and technology to streamline operations. Companies now utilize data to gain valuable insights and make informed decisions that align with their goals. Digitalization has also brought about a shift in the staffing process to assist both job seekers and end-users. This transformation poses a challenge to traditional staffing companies, urging them to adapt to the new ways in order to stay competitive.

Facility Management Services

The global Integrated Facilities Management (IFM) market size was valued at USD 109155.08 million in 2022 and is expected to expand at a CAGR of 7.27% during the forecast period (2023-2030), reaching USD 166299.5 million by 2028.

In India, The industry is expected to experience rapid growth in the forecast period of 2023-2028, with a projected CAGR of 17 percent. Several emerging trends are shaping the field of facilities management, including smart building technology, energy efficiency, sustainability, predictive maintenance, and flexible workspaces.

Security Services

The private security services market is experiencing significant growth worldwide. It is estimated to grow by $56.33 billion during the period of 2022-2026, with a compounded annual growth rate (CAGR) of 4.81%.

In India, the private security industry holds the distinction of being the largest in the world. The sector has experienced remarkable growth in recent years and the demand for private security personnel, remains robust not only in the corporate sector but also in residential households and real estate complexes. Revenue is expected to show an annual growth rate (CAGR 2023-2028) of 8.27%.

Opportunities and Threats Staffing Services

The staffing industry in India has been experiencing consistent growth of 14% per year. This growth trend shows no signs of slowing down, as the industry is currently undergoing a structural transformation. Employers are increasingly relying on flexible staffing to meet their business needs, while the regulatory environment in India is also becoming more favorable, making it easier for employers and staffing players to operate. The future of the staffing industry is closely linked to the job market in the country. Formalizing the non-farm sector is crucial to generate more job opportunities and promote stability in the staffing industry.

Although the gig economy is still in its early stages in India, it is expected to grow in the near future, similar to its growth in developed markets like the US. A recent study by McKinsey suggests that up to 20-30% of the workforce in developed markets is engaged in independent work. Technological advancements will play a significant role in shaping the staffing industry. Staffing companies will need to invest in automation and technology to improve operational efficiencies and enhance the hiring and recruitment process. In the highly competitive staffing industry, specialization can be a key strategy to improve time to hire or "speed to candidate." By focusing on a specific niche, staffing firms can leverage their expertise to provide faster and more effective solutions compared to relying solely on technology. While technology can benefit everyone, specialized players have more flexibility and knowledge in their respective domains.

The overall challenges in the job market, such as generating enough employment opportunities, can impact the demand for staffing services. Competition is another threat to consider, as the industry is likely to face increasing competition from traditional players as well as new entrants. Additionally, disruptive technologies and business models could pose a threat to established staffing companies if they fail to adapt and embrace innovation. Lastly, the availability of skilled talent is crucial for the success of the staffing industry.

Facility Management Services

The facility management services sector is witnessing significant growth due to multiple factors. Not only are buildings becoming smarter with each passing year, but there is also increasing pressure to invest in sustainability due to new legislation. Additionally, building users now have new types of needs and expectations, driving the demand for workplaces that can meet these requirements. These factors, both directly and indirectly, contribute to the growth of the facility management (FM) industry.

Facility Management in India is experiencing a surge in popularity, driven by rapid urban development, a thriving construction sector, increased focus on green buildings, and a growing awareness of the benefits of outsourcing non-core business activities. This trend is expected to continue, with the market projected to grow at a healthy CAGR during the forecast period of 2023-2028.

The Facility Management industry is undergoing a gradual shift towards automated service delivery, with companies embracing technology-driven platforms. These technological advancements ensure that relevant data is collected, recorded, and analysed to enhance management efficiency. Moreover, integrating technology into buildings enables a more innovative Facility Management workforce, resulting in reduced downtime, maintenance costs, improved equipment and structure lifespan, optimized space flow and capacity, enhanced customer value, and more.

As the footprint of facility management expands, there is a growing demand for focused Engineering Services, including energy efficiency audits and Green Building concepts. Companies are increasingly utilizing technologies like Artificial Intelligence and the Internet of Things to improve their operational efficiency and effectiveness.

Overall, the Facility Management industry in India is witnessing substantial growth and embracing technological innovations to drive improvements in service delivery, cost-effectiveness, and sustainability. This trend is expected to continue, further shaping the industry and creating new opportunities for innovation and efficiency in the future.

Security Services

The Private Security Sector has emerged as a significant industry, employing a large workforce, both skilled and unskilled, to cater to the increasing demand from the corporate sector. The deployment of specialized personnel and security systems plays a crucial role in preventing and managing security risks, including accidents and incidents, to ensure smooth operations in various public and private spaces. Security measures and systems are essential for maintaining safety and security in public places such as airports, railway and metro stations, shopping malls, hotels, and public utilities, as well as in industrial complexes, commercial spaces, offices, and residential blocks.

The industry has experienced remarkable growth in the past 6-7 years, with a notable compound annual growth rate (CAGR) of over 25%. There are currently around 15,000 operating companies in the sector, both organized and unorganized. The industry boasts a workforce of over 10 million private security guards, surpassing the number of police officers, which contributes significantly to the industrys growing demand.

In conclusion, the Private Security Sector plays a vital role in meeting the security needs of various sectors, and its growth has been substantial in recent years. However, it is important to ensure that security personnel are fairly compensated for their services, considering the industrys significant contribution to maintaining public safety and security.

Segment wise or product wise performance Staffing Services

The staffing industry in India continues to experience impressive growth, with a notable 14% increase in the number of flexi workers during the 2022-23 fiscal year. This surge has expanded the overall contract workforce to an impressive 1.44 million, signifying the industrys robust upward trajectory. A significant trend in 2023 is the focus on occupancy management, where companies prioritize data quality and technology investments to gain better insights into the workplace. This trend is particularly relevant in the era of hybrid work culture, where Wednesday is becoming the new Monday for many organizations.

Facility Management Services

Regarding sophistication and development, India is one of the largest markets for outsourced facility management services. Small local companies focus on single contracts and single-service solutions, while the regions FM business operates with integrated contracts given by significant vendors from different continents. Given the changing dynamics in the region, there are more chances to combine facility management and corporate real estate in novel ways. Internet of Things (IoT) adoption quickly emerges as a major driver in FM soft services. IoT enables improved decision-making and work process optimization across various industry sectors by providing a continuous, real-time data stream.

Security Services

After 2 /2.5 Years of WFM (Work from Home) and RTO (Return to Office), now the new normal is Hybrid Model and we could see more than 70% people are working from Office. This has resulted in increasing demand for more Real Estate places and also increasing in demand for Man Guarding Security. However as we are growing in the Technology front, widening skill gap or talent shortage in certain industries or regions could limit growth opportunities and hinder the ability to meet client demands. In summary, the private security industry needs to prioritize the standardization of training and certification, invest in human capital development, and embrace technology to meet the evolving security challenges effectively and provide high-quality security services. Technology has crept into every aspect of our lives, including security. Technological evolution has completely transformed the security industry for the better.

Risks and Concerns Staffing Services

With the rapid advancement of technology, there is a growing demand for professionals with specialized skills and expertise. This presents a challenge for staffing companies to keep up with the evolving technology landscape and ensure they can meet clients demands for talent in these areas. To address this challenge, staffing firms need to invest in training and upskilling their employees to stay updated with the latest technologies and industry trends.

Additionally, the slowdown in western countries has yet to impact the Indian market, although it has already affected certain prominent domains. The IT Staffing Industry, in particular, is playing a wait-and-watch game to assess the potential impact. Monitoring the situation and adapting to changing market conditions will be crucial for staffing companies to navigate potential risks and concerns arising from the global economic climate.

Facility Management Services

The supply of professionals that are able to handle large scale infrastructure projects is still relatively low (especially when it comes to technical services) in India, and hence keeping pace with the rapid growth the industry has to offer is a big challenge as even today majority of the professionals require thorough training and time to understand their role. On the other hand, although there is an abundance of unskilled manpower in the country, there are still two underlying problems that FM companies face. The first problem is training the unskilled manpower to adapt to systems and processes to run a professional FM service, and the second problem is the retention of manpower as the unskilled staff is highly prone to switching jobs.

Security Services

One of the significant concerns in the security services industry is the lack of standardization in the training and certification of private security personnel. It is crucial for the industry to adopt international standards to ensure that security personnel receive comprehensive training and are equipped to handle various security challenges effectively. In todays rapidly evolving security landscape, private security personnel are expected to multitask and utilize technology to perform security, safety, and facilitation functions.

Skill development, reskilling, and upskilling are essential aspects that need to be addressed in the private security sector. Investing in the development of human capital and embracing technology are vital steps in preparing the industry to take on greater responsibilities. By focusing on enhancing the skills and knowledge of security personnel, the industry can provide better security services and adapt to changing security needs.

Furthermore, the adoption of standardized training and certification processes will ensure consistency and professionalism across the private security sector. This will not only enhance the competency of security personnel but also contribute to building trust and confidence among clients and the general public.

Outlook

Staffing Services

The organized staffing market in India is expanding beyond traditional skills, positions, and industries and is now gaining prominence in various sectors. Flexi jobs in employment, especially in key sectors like e-commerce, logistics, manufacturing, tourism and hospitality, FMCG, consumer durables, and healthcare, are becoming increasingly prevalent. While flexi staffing, or temporary staffing, is still in the nascent stage in India, the industry is maturing, and established players are starting to explore new offerings, invest in technology, enhance consultative selling capabilities, improve operational efficiencies, and establish a strong presence in relevant locations.

Facility Management Services

The facility management market in India is being propelled by the rapid population growth in the country. The increasing modernization and urbanization trends are also favouring market growth. The rising demand for office modernization and service streamlining is further supporting industry growth. The expanding real estate sector, driven by the construction of both residential and commercial properties such as business centres, offices, manufacturing units, and housing apartments, among other constructions, is particularly fuelling the growth of the integrated facility management segment. The importance of sustainability and ESG considerations in facilities management is on the rise. There is a growing focus on reducing energy consumption, conserving water, and minimizing waste.

Security Services

Deploying specialized personnel and systems to prevent and manage security risks and threats, including accidents and incidents, is crucial for ensuring peaceful operations at various locations. Therefore, it is essential to implement security measures and systems at public places such as airports, railways and metro stations, shopping malls and markets, hotels, public utilities, as well as industrial complexes, commercial spaces, offices, and residential blocks. Technology has continuously evolved and transformed services, leading to advancements in the private security market. Embracing automation is important as it allows us to adapt and work in conjunction with technology. However, it is important to recognize that no matter how advanced automation becomes, it cannot fully replace human workers as there will always be a need for human involvement.

Internal control systems and their adequacy

The Management has laid down internal financial controls to be followed by the Company. The Company has adopted policies and procedures for ensuring orderly and efficient conduct of the business, including adherence to the Companys policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial disclosures. The internal control system is commensurate with the nature of business, size and complexity of operations and has been designed to provide reasonable assurance on the achievement of objectives, effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. The Audit Committee of the Board oversees the internal audit function. The Audit Committee is regularly apprised by the internal auditors through various presentations. The internal audit function provides assurance to the Board that a system of internal control is designed and deployed to manage key business risks and is operating effectively.

Material developments in Human Resources / Industrial Relations front, including number of people employed

i. The total number of personnel including Trainees and Apprentices were more than 17,000 as on March 2023 as compared to 13,615 as on March 2022.

ii. The back office or Non Billable staff strength were 348 as on March 2023 as compared to 355 as on March 2022.

Discussion on financial performance with respect to operational performance

A. Revenue: Revenue grew by 47% to INR 401 Lakhs as compared to the previous financial year. Our company has registered significant growth in the revenue over the previous year.

B. EBITDA: Correspondingly, EBITDA levels have increased by 20% from INR 1309.83 in FY 2022 to INR 1570.79 in FY 23.

C. Finance Costs: Finance costs increased to INR 905.52 Lakhs from INR 665.38 Lakhs on account of higher working capital utilization due to growth in business.

D. Depreciation: Depreciation costs decreased by INR 115.28 Lakhs.

E. Taxation during the year, the Company continued to avail the benefit of Section 80JJAA of the Income Tax Act, 1961 as well as a Deferred Tax Asset on account of time line differences on Depreciation between IT Act & Companies Act, pursuant to which the Tax income is INR 272.16 Lakhs in FY 2023 as against tax expense of INR 148.57 Lakhs in FY 2022.

• Ratio Analysis

Pursuant to Schedule V(B) to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Particulars

2022-2023 2021-2022

Debtors Turnover (No. of Times)

4.03 3.46

Inventory Turnover (No. of Times)

1.87 1.67

Interest Coverage Ratio (No. of Times)

1.31 1.23

Current Ratio (No. of Times)

1.43 1.47

Debt Equity Ratio

1.54 1.49

Operating Profit Margin (%)

2.87 2.82

Net Profit Margin (%)

1.28 0.91

Return on Net Worth (%)

9.04 4.74

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