Zicom Electronic Security Systems Ltd Management Discussions.

INTRODUCTION :

2018-19 was a year of revival for India and it was no different for Zicom Group. We are firmly entrenched on the path to recovery with focus on settlement of its debt, restructuring of its Group by hiving off subsidiaries and driving organisation change to bring new Version of Zicom to the market. With required human resources and technology in place, the Company seems well posed for revival after completing its divestment agenda in the year 2019-20.

MACRO ECONOMIC REVIEW :

After 3 years of over 7% growth, the Indian Economy slowed down slightly in 2018-19 recording GDP growth of 6.4%. Despite this slowdown, the economy continued to remain one of the fastest growing amongst major global economies. From a Global perspective there are certain concerns. The main concern is growing protectionist tendencies in some countries especially USA which is driving trade barriers in China, India and other developing countries. The other concerns include price of crude oil which has grown by 14% over the average price of previous financial year. These two main factors could create dampening effect on Global economic growth. India is also going through a difficult phase after demonetisation and GST implementation. The non-performing assets (NPA) of the banking industry mainly public sector banks have grown phenomenally and is estimated around Rs. 9 lakh crore which is 10-11% of the banking assets. Further, report by Credit Rating Agency (CARE), shows that from a global perspective, India was 5 worst in terms of bad loans in the system as the ratio of NPA to outstanding loan is way high. Huge piling of NPA has damaged confidence of bankers and new lending to Corporate Sector has badly affected. This has created atmosphere of mistrust amongst corporate and bankers. Therefore, this has made task of revival challenging for most of the NPA tagged Corporate such as Zicom. In a major development, RBI has withdrawn host of restructuring schemes and directed bankers to take the borrowers IBC route to resolve debt situation, however bearing large asset based Corporates, the experience of bankers in IBC from recovery perspective is not encouraging mainly for small and mid size companies. Therefore, it is imperative that all stakeholders, under the aegis of RBI evolve a cohesive and synchronized joint action plan to revive Corporate under NPA category and to protect entrepreneurship spirit of India. At present uncertain regulatory environment, ongoing probes and allegation of improprieties against bankers is denting credit availability in economy and making liquidity situation worst. In summary therefore though Indian Economy is witnessing slowdown as compared to earlier 3 years, it is still in fairly healthy state. Growth in public investments for infrastructure is driving GDP while private investment is still watchful. There are concerns regarding NPA overhang and the possibility of widening current account deficit due to rising crude oil prices. With stability in operationalizing GST regime in India, Government investment in infrastructure and continued commitment to fiscal prudence augur well for Indian Economy.

BUSINESS OVERVIEW :

Zicom Electronic Security Systems Ltd. is engaged in the business of distribution of e-Surveillance Equipments; such as CCTV cameras, monitors, DVRs / NVRs and other accessories. Fire Equipments; such as sensors, fire extinguishers, Access Control Equipments; such as proximity / biometric based locks and other accessories and Home Safety Equipments; such as Video Door Phones and Home Intrusion Alarm. Our primary objective is to drive the market with innovative products, latest technology under brand of Zicom. Due to impact of “Make in India” initiative and to remain cost effective, Zicom is negotiating with several overseas manufacturers to set-up joint manufacturing facility to regain the market share.

The market for security and surveillance product is estimated around Rs. 5,500 crore and is expected to grow CAGR of 22% until FY 21. The key growth drivers for the distribution market include customer industry growth, increasing threat perception and reducing product prices. Monitoring of premises by CCTV equipment is getting regulated by the Government. “Make in India” initiative of the Government is driving the product price downwards which in turn is driving economic growth. There are numerous competitors in the security and surveillance distribution market ranging from small assemblers to MNCs such as UTC, Honeywell, HID. Zicom distributes the products through numerous channel partners across the country; however loyalty for specific brand is not of much relevance to the channel partner. Zicoms Distribution business today is going through difficult time due to non-availability of working capital. Resources crunch has impacted stocking strength of various products by Zicom for making it available to channel partners on time. As availability of variety of the products is a key factor for driving the business of the distribution, Zicom is moving slowly on the business path for the time being. Also, Zicom is not investing enough resources to increase the Brand recall which has also affected its performance. Zicom pioneered the concept of providing Security as a Service (SaaS) in India. Zicom SaaS provides wide range of services from simple surveillance equipment monitoring to advanced video analytics. The services offered by Zicom SaaS can be classified in following broad categories based on complexity of services.

UPTIME SURVEILLANCE SYSTEMS :

This includes daily health check up of equipment, replacement of faulty equipment and regular preventive maintenance.

ALARM MONITORING :

This service is being offered mainly to BFSI segment which include installation of various sensors such as vibration sensors, motion sensors, heat / temperature sensors, unidentified object sensors, shutter up / down sensors, etc. These services are mainly offered for monitoring ATMs.

LIVE FEED MONITORING :

This includes live monitoring of sites based on trigger generated by various sensors.

TREND BASED ANALYTICAL SERVICES :

This includes employee behaviour monitoring, customer behaviour monitoring, footfall counting, etc. The overall size of the Zicom SaaS market is estimated around Rs. 200 crores with potential to grow above Rs. 5,000 crores in next 5 years.

The demand for SaaS services will arrive mainly from BFSI, Retail & Hospitality, Educational Institutions, Hospitals, Distribution Centres, etc. The key growth driver for SaaS market includes functionality assurance, cost benefits and enhanced flexibility and analytics. By outsourcing security through SaaS model, customers get assurance of working conditions of all sensors and transfer risk of obsolescence and AMC to Service Provider. Also, customer need not pay up-front Capex and can benefit from reduction in Opex cost incurred on security guard. These services are mainly suited for organisation having multi-site operations. Zicom SaaS e-SaaS services are mainly driven through two business divisions i.e. Enterprise Division which focus on Retail Chains, Banks, Financial Services and Insurance (BFSI) companies, Gold Loan Sector companies, Food Chains, Entertainments, Health Care, Education, Logistics, Warehouse, Commercial Establishments, SMEs, etc. and Make Your City Safe (MYCS) Division which focus on housing societies in Mumbai, Pune, Ahmedabad and Hyderabad. On the Enterprise side, Zicom SaaS is recognised for its Pan India multi segment presence but faces implementation challenges on account of weakness in investing up-front capex cost for providing services. Despite this Zicom SaaS has succeeded in renewing its existing contracts by engaging proactively with the customers. Unlike Enterprise Division, MYCS Division moves slowly on adding sites as each customer represents one site. BFSI contributes significantly to e-SaaS revenue.

FIRE DETECTION AND PROTECTION BUSINESS IN UAE AND QATAR :

Zicoms fire detection and protection business is mainly Gulf centric, particularly focused in the Middle East countries like seven emirates of United Arab Emirates, Qatar, Oman, Saudi Arabia, and surrounding Gulf Co-operation Council (GCC) countries. Therefore, any changes and development in business and economic scenario in these regions also affect our business prospects to a great extent. We carry this business under two step-down subsidiary companies, Unisafe Fire Protection Specialists LLC, Dubai (“Unisafe Dubai”) and Phoenix International WLL, Qatar (“Phoenix Qatar”). The Middle East market received severe set back due to fall in the oil price in the year 2015-16 which resulted in cutback in budgetary spending. The infrastructure growth of Middle East has been slowed down substantially with many projects being stuck up leading to EPC and MEP companies facing liquidity challenges due to lack of cashflow. Many small and medium enterprises which represent over 2 and 3 layer players in the market are facing difficult task of survival and many moved out of the market. The geo political situation of the region has received further set back with the embargo placed by UAE and Kingdom of Saudi Arabia on Qatar. The land route to Qatar has been blocked resulting in complete stoppage of material movement. The majority of the projects of Qatar got stalled resulting in loss of value for all companies operating in the region. Unisafe Dubai and Phoenix Qatar has received major setback due to stoppage of Projects. The biggest challenge is to recover money from such stuck up Projects. Both these companies have down sized its operations substantially. Unless Government takes effective steps to infuse funding in the economy immediately, lot of companies may find their way out of Middle East market.

CORPORATE OVERVIEW :

All the business models of the Company, except Zicom SaaS, are undergoing challenging times. To resolve debt situation of Zicoms India business, the Company has introduced various investors to bankers. However, due to mismatch of expectation, between value offered by investor and expectation of bankers, the Company could not conclude one-time settlement and move forward to revive itself back on the path of growth. Similarly in the Middle East, the Company has negotiated with strategic investor to revive the business; however response of the banks to one-time settlement offer is lukewarm due to administrative challenges, lack of decision making and focus of bankers on NPA resolution of large projects. Zicom SaaS business model requires continuous deployment of resources in capital equipments for remote surveillance. Due to overall constraint of the Group to invest in this profitable venture, Zicom SaaS could not grow as expected. Zicom SaaS is looking for private equity investor to drive the growth further. As this is Internet of Things (IoT) based model, it has got enormous potential of growth and profitability.

During the year under review, the Bankers of the Company continue to monitor operation of the account under TRA mechanism and the Company is near finalization to work out divestment of Zicom SaaS to resolve the debt situation of both Zicom and Zicom SaaS. The Company has taken all distress steps necessary for its survival in short run and the Management is hopeful of revival of the business in 2019-20.

FINANCIAL PERFORMANCE VIS-A-VIS OPERATIONAL PERFORMANCE, INTERNAL CONTROL SYSTEM AND ITS ADEQUACY AND HUMAN RESOURCES :

The financial and operational performance has already been discussed at length in Directors Report under the heads: Operational Performance; Business Developments and Prospects, Finance and Subsidiary and Joint Venture Companies. A separate para discussing on Internal Control Systems and its Adequacy and various aspects of Human Resources of the Company has also been included in Directors Report.

CAUTIONARY STATEMENT :

Certain statements as discussed and mentioned in the Management Discussion and Analysis and elsewhere constitute forward-looking statements articulated as the Managements expectations for the future business prospects of the Company. However, there are risks and uncertainties associated due to the general economic conditions in which the Company operates. Also, the factors like the nature of the Companys business, foreign currency fluctuations, regulatory initiatives, tender processes in the Government, Public Sector and other large undertakings, competition, etc. are not in the control of the Company. Such uncontrollable factors are crucial for success of the Companys business plans or predictions, which may cause the actual results to materially differ from the performance or achievements, discussed or implied by such forward looking statements.