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Edited Transcript of SECR.NS earnings conference call or presentation 25-Jul-19 8:30am GMT

Q1 2020 Security and Intelligence Services (INDIA) Ltd Earnings Call

NEW DELHI Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Security and Intelligence Services (INDIA) Ltd earnings conference call or presentation Thursday, July 25, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Devesh Desai

Security and Intelligence Services (India) Limited - Group CFO

* Vamshidhar Guthikonda

Security and Intelligence Services (India) Limited - President of M&A and IR

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Conference Call Participants

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* Abhijit R. Akella

IIFL Research - VP

* Aditya Bagul

Axis Capital Limited, Research Division - Assistant VP of Midcaps

* Alok Deshpande

Edelweiss Securities Ltd., Research Division - Research Analyst

* Devang Patel;Crest Wealth Management Pvt. Ltd;AVP, Research

* Garima Mishra

Kotak Securities (Institutional Equities) - Research Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Sheetalkumar Shah;IDBI Capital Markets & Securities Ltd.;Head, PMS

* Sudheer Guntupalli

AMBIT Capital Private Limited, Research Division - Associate of Technology

* Varun Rao;Maybank Asset Management;Manager

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Presentation

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [1]

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Devesh, CFO of SIS. We have Vamshidhar Guthikonda, President, M&A and Investor Relations; and also Mr. Rituraj Sinha, the Group Managing Director, with me on the call, along with SGA, who are our Investor Relations advisers.

I hope everyone has had an opportunity to look at our results and the earnings note and document we have uploaded both on the stock exchange and on the company website at sisindia.com.

We are extremely happy to report that SIS Group has started FY '20 with a solid quarter. We crossed the INR 2,000 crore quarterly run rate mark in this quarter. With this, we have now achieved a quarterly CAGR of 6.2% over the last 9 quarters as far as revenue is concerned. The EBITDA has grown even faster during the same period. The quarterly CAGR of EBITDA growth is 8.1% over the same period. These results and performance are in spite of the economic headwinds which are facing the country today, but it also reinforces the predictability nature of our performance as the customers see stickiness to our services across all the group entities.

All our business units have continued to deliver strong revenue and profit metrics. Our consolidated revenues came in at INR 2,008 crores for the first quarter of FY '20, which is an increase of 2.7% over the previous quarter and almost 25% increase over the same quarter in the last year. Similarly, our EBITDA was INR 125 crores in the current quarter, which was a quarter-on-quarter increase of 8.8% and 67% increase over the same quarter in the previous year.

The increase in EBITDA has been the result of operating leverage across segments along with various profit improvement and cost management measures implemented across the larger group entities. The margin for SIS international security has also seen a significant increase, and that's mainly due to the margin-accretive nature of the recent acquisitions, coupled with some profit improvement measures across the existing businesses.

On the acquisitions, we are pleased to report that all acquisitions are in the process of getting integrated smoothly into the SIS Group. We have spent considerable time in the integration process, planning and implementation and consolidation of these entities within the SIS Group. And I'm happy to report that all of that continued to go as per plan and are contributing to the margin improvement initiatives.

Our return ratios also continue to hold up well despite additional capital being deployed into the acquisitions last year. We are currently at 21% return on net worth despite a large hit on our P&L on account of the various noncash items, in interest and amortization, due to the business combination accounting treatment for acquisitions.

However, our leverage levels continue to be comfortable at 1.4x net debt to EBITDA. And with an average cost of debt at less than 7.5%, I think we are comfortably placed.

With this, I would like to now open the floor for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Aditya Bagul from Axis Capital Limited.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [2]

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Very congratulations on a really good set of numbers. A couple of questions from my end. One is during our analyst meet last time around, we discussed various initiatives including One SIS, et cetera. Can you help us understand how these are going into the ethos of SIS? And how is it bringing about the change in organic growth that we are looking at? That's question number one.

Question number two is I was just looking at our international segment if you can just help me understand what was the organic growth in that segment.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [3]

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Okay. So let me take up that international point first. So we have had organic growth of 27% over the same quarter last year as far as EBITDA is concerned. As far as revenue is concerned, it was flat mainly due to the Commonwealth Games event revenue we had in the first quarter last year, which was around $8 million. That, of course, has not repeated itself this year. But in spite of that, we are flat. It means that we've actually grown.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [4]

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Yes, net of that. Yes.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [5]

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Net of that. So as far as the market size is concerned, yes, we did speak about that, and it's a bit of early days for that. We are putting together our team, and we are looking at jointly bidding and presenting composite bids and proposals for -- to continue and develop this One SIS concept.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [6]

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Yes. Aditya, Vamshi here. Yes. So just to pick up from Devesh on the One SIS point, yes, the One SIS is something which we launched at, as you alluded to, midway last year just to bring a lot of synergies across our group entities and offer integrated solutions to clients. This is something which obviously is at quite a nascent phase, but as we look forward into the next 4, 5 years for the group, this is going to be increasingly important part of what we offer, combined solutions, offer -- bring more customer stickiness into the group and also reduce overheads and cost per revenue, provide better operating margins through a more consultative project management kind of approach. But as of now it's still quite nascent.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [7]

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Sure. No, so my point was how do -- these are new initiatives, right, One SIS or as you look at Man-Tech solutions, so all these initiatives, how do they feed into our organic growth engine? And what is the outlook for that maybe over a period of the next 2 years or so, if you can shed some color on that?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [8]

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Yes. I mean the One SIS figure has a separate P&L, which we are tracking internally, Jasmer from our Dusters management team is heading that P&L and in the second half, which is [bearing]. And he has internal targets that which are aggressive. Of course, the base is quite small. But that has been set up. The One SIS core team has been set up with a cross-functional team comprising business leaders from every business unit which we have, which collaboratively interacts on every project, how they can be a joint bid, combined approach to offering integrated solutions. So there is -- now there is a lot of things have been provided to all the sales managers. There is -- there have been workshops, which is being handled. So there's a lot of internal work which has gone into the whole One SIS program.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [9]

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Sure. That's quite helpful. One last question, probably, Devesh, sir, if you can help me. I read through the notes to accounts. It said that the impact of Ind AS 116 is not very material on our profitability for this quarter. Is there a chance you can elaborate a little on that? And how would the margins look if we were to exclude that?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [10]

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So we have computed the impact of 116, and as you see, we've done a retrospective catch-up method. But for the quarter, the impact on EBITDA is INR 7 crores. So if Ind AS 116 were not in the equation, the EBITDA would have been INR 117 crores -- INR 118 crores. That would have meant a 5.9% consolidated EBITDA versus the 6.2% consolidated EBITDA we have today.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [11]

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Perfect, sir. And then that would have an offsetting impact on the depreciation and interest?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [12]

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No. The depreciation and interest has gone up as a result and at that level, it's a INR 1.5 crores negative impact in this quarter.

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Operator [13]

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(Operator Instructions) The next question is from the line of Alok Deshpande from Edelweiss.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [14]

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I have a question on the facility management segment. So just wanted to understand 2 things. One is what is the -- I mean, given the slowdown that we are seeing generally in the economy, what is the sort of outlook or pace of growth that you're looking at in this segment of facility management? And also, as you mention in the press release, is now 6% in this segment a more normalized or a stable margin that you'd be working with?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [15]

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So if you look at the growth and while you're talking about the slowdown and everything, you see on an organic basis, our revenue has grown 34% in facility management over the same quarter last year. And even the EBITDA has grown by 36% over the same quarter as the last year. So clearly, that effect is not there. The headwind effect is not there. As we've said earlier in the past also that both the security services business and the FM business, being largely recession and economy resilient, whether there's a downturn, upturn. We have continued seeing over the cycle of the last 10, 15 years, we've seen different cycles of economic progress and economic ups and downs. But we've seen that growth has generally been in that 30%, 35% range on a CAGR basis, even organically. So I don't think there's something we are seeing much of an effect over there as far as that's concerned. As far as the EBITDA or the margin profile is concerned, yes, we think 6% to 6.5% is a sweet spot and a sustainable range for EBITDA in FM segment.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [16]

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Sure, sir, understood. And any color you can give on how we should look at the tax rate? I mean, of course, we are aware of the 80JJ Act and everything. But how should we look -- I mean, this quarter and the past quarter, we've seen that there has been a sort of positive impact of tax. So how should we to read that?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [17]

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There's [definitely] going to be some changes in the 80JJ provisions, and we had one change last year where the 80JJ impact, the tax benefit actually increased. We think that maybe this quarter will be the trend [uptick] for the next 2 quarters. And of course, the 80JJ benefit also depends on the growth, and we don't see the growth tapering off. So I think we should look at the tax rate the way it was this quarter.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [18]

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Okay. So for the whole year, the effective tax rate will be almost close to 0 or negative. Is that what you're implying here? Or...

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [19]

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On a consolidated basis, yes.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [20]

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Okay. Okay. And just one last question on -- there's a comment in your presentation about the working capital, which is you mentioned that in Q1 and Q2, usually there tends to be a receivable cycle which gets expanded. So any comment on that? So should we look at Q3, Q4 as periods where there's sort of unwinds again and your debt levels go down? How should we look at that?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [21]

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I think it typically works differently -- the cycle works differently in both India and internationally. So in India, of course, Q2 is -- Q1 is generally a low month for -- a low quarter for collections, and the DSO tends to go up. Q3 and -- Q2, Q3, Q4 will start -- tends to taper down. We'll see the best performance in possibly Q3 and Q4 as far as the DSO is concerned. Internationally, given that Australia is our biggest business, we see that Q2 and Q4 would be the better quarters and Q1 and Q3 will generally be the lower quarters as far as the collection performance is concerned. So we find DSO higher in Q1 and Q3, and they will come down in Q2 and Q4.

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Operator [22]

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(Operator Instructions) The next question is from the line of [Amal Maurya from Alpha Alternative Advisors].

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Unidentified Analyst, [23]

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Congratulations for a very good set of numbers. So first thing is your debt levels, which has gone up to around 600 levels, how does that -- what would be like -- I mean, how do we target it to reduce over a period of time? What is that we are looking a comfortable debt level?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [24]

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I think at this point, net debt to EBITDA is at 1.4, and of course in this quarter, there are mainly 3 things which have gone to increase that net debt over the previous quarter. First is, of course, the impact of the new accounting standard on leases. That has gone to increase the net debt. That has increased net debt by INR 106 crores on a consolidated basis in this quarter compared to March 2019.

The second component is that we purchased a business in New Zealand. We have reported it in the -- to the stock exchange, and that has increased our long-term debt by INR 40 crores, which is the $8 million. And the balance, INR 130 crores odd, has been general increase in the working capital cycle, as we just explained about the DSO. That has been -- that was driven by the increase in the net debt-to-EBITDA ratio and the net debt levels.

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Unidentified Analyst, [25]

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So sir, in this -- like you said that net debt gone up because of the Ind AS would be around INR 106 crores, right? So the gross debt would be -- I mean, what does that accounting change happen in this? Like if we can just -- I mean...

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [26]

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So the accounting change, as you all know, across the world, this change has happened in both IFRS and consequently in Ind AS. All assets which have been taken on lease have to be brought on to the books based on the underlying value of the asset. So this would be all our branches and offices on lease. A significant amount of our motor vehicles in Australia, which are used for the business, are also on lease. So the standard says that all of these things have to be brought onto the books. You have to value all your future lease rentals discounted to present value and create an asset and a corresponding liability in your books. So what happens is that the rental expense is no longer treated as a rental expense or an operating expense in your books. It gets converted to accounting of debt and assets, where the assets get depreciated over the life of the lease and the debt gets unwound through a finance cost charge and a payment charge over the time -- over the term of the lease. So as a result, what's happened is that, across the board, we would generally tend to see an increase in the debt level and the capital employed levels across every company which is having to convert to the standard and which has got a large number of assets on lease.

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Unidentified Analyst, [27]

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Okay. Okay. That's helpful, sir. Secondly, sir, if I may, like in international business, like what are the services we are offering in international business? And can you help me, what is the revenue mix in the, geo-wise, revenue mix of the international business if possible?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [28]

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So internationally, we are focusing on security and like services only. So we typically tend to offer the (inaudible) and static guarding service. We offer alarm monitoring and [access] services internationally in all the 4 -- all the 3 geographies we have, which is Australia, New Zealand and Singapore.

The next question was you wanted to know the geography...

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Unidentified Analyst, [29]

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Yes, yes, mix of the revenue, yes.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [30]

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So the total international business accounts for 45% of our group revenues in Q1. Out of that, close to -- I can just tell you that the share between Australia and Singapore -- just one second.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [31]

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So we would have approximately 30 -- 35%.

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Unidentified Analyst, [32]

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Australia, right?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [33]

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No. No, actually, Singapore is probably 8% to 9%, and the rest would be Australia.

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Unidentified Analyst, [34]

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And New Zealand business will be consolidated there?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [35]

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New Zealand also consolidated. New Zealand is around, I would say...

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [36]

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Less than 1%.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [37]

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Less than 1%, just 1% at this point.

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Unidentified Analyst, [38]

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Just 1% at this point of time.

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Operator [39]

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Mr. [Maurya], do you have any follow-up questions?

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Unidentified Analyst, [40]

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No, no.

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Operator [41]

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The next question is from the line of Abhijit Akella from India Infoline

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Abhijit R. Akella, IIFL Research - VP [42]

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First of all, just one clarification on the interest expense line, the finance cost. I think the presentation mentions that under PPA-related adjustments, the finance cost impact was about INR 11.8 crores, and yet, the sequential increase in finance cost this quarter is less than INR 2 crores. So just hoping to understand whether there's been a decrease in the cash interest expense outlook.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [43]

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Tell me where you computed that because that's not what I'm getting, Abhijit.

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Abhijit R. Akella, IIFL Research - VP [44]

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So the finance cost this quarter is 37, right?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [45]

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Right.

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Abhijit R. Akella, IIFL Research - VP [46]

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And last quarter, 35.7?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [47]

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Right.

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Abhijit R. Akella, IIFL Research - VP [48]

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Yes. So that's INR 1.4 crore, INR 1.5 crore increase, whereas the presentation on Slide 9 where you have the PPA-related adjustments paragraph, right, there it says that finance cost with respect to unwinding of PV of PPA-related future consideration of INR 11.8 crores.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [49]

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Right. There will be a similar -- there will be a -- some number last quarter also, right?

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Abhijit R. Akella, IIFL Research - VP [50]

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Okay. Okay. Okay. So it is not only...

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [51]

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(inaudible) There are payments of cash, too.

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Abhijit R. Akella, IIFL Research - VP [52]

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Okay. Okay.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [53]

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Correct. That would be the same adjustment for the previous quarter. If you look in the results, we have highlighted in the segment results page, we've highlighted the actual cash interest or finance cost separately and charge it on account of business combination separately. So that gives you an idea of what the cash interest is moving. But I also would like to tell you that the cash, the interest and depreciation this quarter underwent an increase again because of lease accounting standard, which has now pushed the rental expense into interest expense and depreciation. So there is an effect of that also in your cash interest under normal depreciation output.

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Abhijit R. Akella, IIFL Research - VP [54]

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Okay. Understood. And just to clarify, I think at the analyst meet, there was some discussion about refinancing our debt at a lower cost. So has there been any progress on that front?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [55]

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No, not as of now. I think we've -- we see that the markets are in a bit of a kind of a turmoil right after the election. But I think once there's some stability to the market, probably we can look at something there. But currently, nothing on that (inaudible).

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [56]

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I think, Abhijit, we would have mentioned that we had paid down some debt last year. Maybe that's the difference in the context you are taking.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [57]

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Yes.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [58]

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I don't think we spoke about a refinancing at this point, but...

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Abhijit R. Akella, IIFL Research - VP [59]

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Okay. All right. And then just on the tax rate, I noted your comment about similar tax rate going forward as we saw this quarter. So should we -- does that mean that there'll be this kind of, I mean, 30% negative tax rate also, I mean, as a percentage of PBT?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [60]

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On a consolidated basis, yes, I think you can consider that for now.

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Abhijit R. Akella, IIFL Research - VP [61]

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Okay. For the full year as well?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [62]

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Yes.

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Abhijit R. Akella, IIFL Research - VP [63]

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Okay. And one other thing was, in the papers today, there's a mention about a sharp minimum wage increase in Maharashtra that's being proposed, almost a doubling of the minimum wage. Now obviously in the past, we've seen both in the security services business as well as in FM, we've received significant benefits whenever this has happened. So if you could give some perspective on how large Maharashtra is as percentage of your security and/or FM businesses and how much of a benefit this could be.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [64]

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Yes. I mean we have yet to see the notification. Probably we can respond to that once we see that. But that being said, West has historically been a weaker segment for us, accounting for probably around 18% to 20% of our revenues. But that being said, as you would know and have just alluded to, whether in security or in FM, any increase in minimum wage is always beneficial for us on 2 fronts. One is it brings better-quality workforce who are willing to stay on longer and secondly, obviously because our business is essentially a cost-plus business. So these are essentially passed on to the customers. So there's a good increase to the revenue and your margins and EBITDA during the year of increase. So that's the more generic answer, but specifically, we can answer only after we see the notification, which you just said came today.

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Abhijit R. Akella, IIFL Research - VP [65]

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All right. Got it. And last, a little bit of guidance I'll seek from your 2 points. One is on the minority interest, if you could just help us in terms of how to think about it. And then in terms of the debt position, is this kind of the leverage level something you're looking to stay with? Or is there a chance of some reduction going forward?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [66]

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So the first thing on the minority interest. Today, minority interest is computed only for one entity in the group, which is the Terminix pest control business. There's no other entity which is having minority interest. And for information, we have -- that business is now, for the last 2 quarters, is EBITDA positive. So I believe that's now turned the corner, and we would have that being a positive contributor to the earnings.

As far as the debt levels are concerned, as we just mentioned, it is at 1 [to 1.4x] net debt-to-EBITDA levels. We believe in the near term, it's not going to exceed that. It's going to stay in the 1% to 1.4% (sic) [1 to 1.4x] range in the near term.

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Abhijit R. Akella, IIFL Research - VP [67]

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All right. Perfect. Just to clarify, the reason why the other subsidiaries are not under minority interest is because they have been accounted for under the NCI put option rule, right?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [68]

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Correct, correct.

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Abhijit R. Akella, IIFL Research - VP [69]

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Got it. Got it. Perfect.

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Operator [70]

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The next question is from the line of Madhu Babu from Centrum Broking.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [71]

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Sir, could you give the y-o-y organic growth of the 3 segments? Because there were acquisitions, I think, in most of them. So the 1Q, to see the y-o-y growth on the revenue side.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [72]

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Yes. So security services India grew organically 23% year-on-year. International was flat year-on-year as we have explained the reason being that last year, there was a Commonwealth Games revenue of $8 million, which of course has not repeated this year. So technically, I would say that we have grown by around [4% to 5%] on that. Facility management, revenue grew 34% organically over the same quarter last year.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [73]

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Okay. And facility management last year, we had the Duster uptick in wages and all that. So what is a more sustainable growth, I think, considering the base has also increased from our earlier levels?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [74]

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We think that we will have -- or we believe that we can have this 30% odd growth in FM also. But while I'm talking about the revenue growth, I would like to point out to the audience that the EBITDA growth has, organically, has grown faster than the revenue growth in all the 3 segments, signifying 2 things, that operating leverage is kicking in and will continue to kick in. And secondly, the result of all our profit management and profit improvement initiatives we have undertaken in all the businesses, that's the result of EBITDA growth organically being faster than the revenue growth organically.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [75]

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So which are the subsegments we had which we think that will help this kind of growth? Because I think last year, we talked about the railway contracts and some of those new initiatives. So for this kind of growth momentum, which are the subsegments or which are the regions which we see this kind of impact just coming from?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [76]

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I think this is, Madhu, as -- Vamshi here. As we have said quite often in the past, there's no particular segment which drives revenue or any region which drives revenue. There's always a couple of segments which go down in a quarter, a couple of segments which pick up. Our customer segment is very broad-based, so -- and even our sales planning or targeting is not built around going after one particular channel or one customer segment.

So I don't think there's any one segment which is driving this growth. It's been pretty broad-based. Of course, as you said, last year, there was a good increase from the railway business, which we see continuing because the railway is going to be important client, and there's been -- there has been significant liberalization by the government in railway tenders. But I think fundamentally, what lies at the core is our relative inelasticity to the economic cycles. Irrespective of -- because the way the economy is heading up or down, there's always demand for our services.

I think that's what underpins our continued growth. And we feel very comfortable going into Q2, Q3, the way our monthly run rate is. It gives a very good visibility. We ended Q1 at June. June, we had a revenue run rate of INR 670 crores across our group.

So we have very strong visibility for the rest of the year. And in aggregate, actually once Q1 and Q2 are lumped in, in terms of monthly revenues, you know pretty much with a very high level of predictability into how the year-end is going to look like. I hope that answers your question.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [77]

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Yes. And sir, last year, we had at a similar quarter, we had a bad debt. But even now, if you see I think the other sectors, there's pain in collections and all in like -- so I mean, how comfortable are we on the India receivables? And would we see any scope for some bad debt in later 2Q?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [78]

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So as I said that Q2 -- Q1 is generally a slow quarter because Q4 is always the best quarter for the DSO and the collections. This is a general trend we have seen. This is not something unusual. Last year, there were some one-off items. We had to take a, like a call internally on providing for certain accounts that had actually gone bad. But this quarter, we have seen it's a general normal trend, which has been followed. And it's not -- no specific large account or accounts which have actually gone bad. So in that sense, there's a difference between the same quarter last year, no difference in the trend, underlying trend as such.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [79]

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And also, Madhu, what we did last year was we tightened up a lot of our internal trade control policies, the kind of customers we take onboard. Instead of just giving the free rein to the salespeople on taking on customers without having visibility into their credit history, we started going into that level of detail last year. And we put significant controls so that those kinds of issues don't recur.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [80]

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So DSO, including non-billed, like 72 days, that would be the range going forward?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [81]

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So that's not the normal. At this point, it's like security business is around 70 to 72 days. Our target is keeping it between the 60 to 65 days range, which is where we were in the last quarter. And over the quarter, this will certainly unwind itself.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [82]

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Okay. So just one last question, the minimum -- the wage hikes. Different states will give a different [time line]. So what is the outlook there, if I'm right?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [83]

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Can you repeat the question?

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [84]

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The wage -- the minimum wage hike, the states will increase that, so what is -- when -- in which quarter that will happen?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [85]

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It happens through the year. There's no particular...

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [86]

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Yes, yes, that's what -- yes.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [87]

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Every state has its own notifications council, but that too is not -- like Maharashtra announced now this year. It might announce in October next year. So there's no particular rationale or cycle to it. It's purely -- I mean, there's no set pattern at all. Some do it once a year. Some states do it twice a year.

But what is, I think, more important right now is the way the government is pushing to solve these labor reforms, especially on the payment of -- areas. As the code on wages essentially, it combines all these wage bills into one consolidated wage bill -- wage code, rather. I think that is crucial in seeing how the whole formalization story is going to play out. I think that is -- I think that's going to be vital for how fast the accelerating the organized segment can take on the [unorganized] sector.

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Operator [88]

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(Operator Instructions) The next question is from the line of Varun Rao from Maybank.

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Varun Rao;Maybank Asset Management;Manager, [89]

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My questions -- all my questions have been answered. I just wanted to double check on the India security piece. What is the EBITDA organic growth?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [90]

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So the revenue organic growth is 23%, and the EBITDA organic growth is 52%.

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Varun Rao;Maybank Asset Management;Manager, [91]

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Okay. And these levels of margin basically for the India and the international piece, do you think are sustainable?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [92]

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Yes, we believe these are the sustainable levels. The -- for India, we look at anywhere between 6.5% to 7% as a range, and in international, we look at 5.5% to 6% as a range we should be achieving.

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Operator [93]

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The next question is from the line of [Nitin Sidmashte], individual investor.

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Unidentified Participant, [94]

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Hello?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [95]

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Yes, we can hear you.

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Unidentified Participant, [96]

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Yes. As we go forward, I believe that you're going to use a lot more man and machine together, which you're already doing in Australia. So please give an outline of how you plan to bring in more tech into India. That's question number one. And number two is when we start buying companies in India and abroad, what are your basis for valuation and such? As in how much are you willing to pay for what kind of profit and revenue?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [97]

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Yes. So let me take the questions, [Nitin]. So for the first question on technology, technology is going to be the biggest game changer in the security industry, especially over the next few years. I think the industry is not going to be linearly dependent on people as it has historically been. Technology is going to become cheaper. People are becoming -- going to become costlier. I mean if Maharashtra increases the wages by 2x. As said, some other states plan to follow, that is going to be the inching up of the wage structure. And there's newer technology coming in that's cheaper, which can do a lot of things more efficiently. And SIS is in the business of providing solutions. We're not in the business of providing people. So if the same security solution can be provided through a more efficient mix of technology and people or only technology, we'll be more than happy to do it.

But currently, I think we are a bit nascent. Right there, currently, our whole technology/solutions business is probably less than 5% of our overall revenues in India. But I think the -- at this moment, we have more an evangelization case, where we are trying to educate customers on the kind of solutions which are out there, what can we bring to the table, how they need to look at their own security needs and think of the delivery in a more creative manner, challenges deploying people in some traditional solutions. So technology is going to be important and is going to be vital.

All our -- we've done a lot of training, invested a lot of resources in getting our sales team trained on the latest products and offerings out there, how to combine solutions. We've done some innovative test cases for HPCL, IGL, Gail, which you might have seen at the annual analyst meet that you had in Bombay. So we are piloting and testing our various solutions and test cases, which are going to be important selling points for us as we go into the market increasingly. But yes, in a nutshell, I think -- we hope to keep on increasing the solutions part as a part of revenues over the next few years.

And as far as your second question was concerned, which was about mergers and acquisitions and how we go in valuing companies, look, in each -- obviously, we -- like any other acquisition, we do a deep dive into the financials model, do VC valuation at different kind of multiples which are out there. But ultimately, it has to boil down to an internal rate of return which has to work for us.

So our internal investment committee has set us a hurdle rate of 22% to 25% IRR, which has to be achieved on all large transactions. And that is our key hurdle rate. So we don't go by multiples per se. We look more at IRR when we evaluate deals. And just like -- as we had indicated in the note which was uploaded actually last night, Dusters is the ideal case, where we completed the final buyout of the promoters this week, and the deal is doing a return of -- an IRR of 32% for us. And we do innovative structures where we incentivize the promoters to stay on with us and build the business together and incentivize them through higher payouts linked to EBITDA growth, EBITDA margins. So we keep innovating structures so that our downside is protected and upside is incentivized.

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Unidentified Participant, [98]

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Okay. Okay. My biggest takeaway is that there are solutions and not people.

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Operator [99]

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(Operator Instructions) The next question is from the line of Garima Mishra from Kotak Securities Limited.

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Garima Mishra, Kotak Securities (Institutional Equities) - Research Analyst [100]

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Two questions from my side. One, the impact of purchase price accounting to depreciation and interest, has all of it been taken this quarter and so these charges should normalize next quarter onwards? Or we should expect some heightened charges next quarter also? And second, if you could throw some light on your CapEx outflows for this year, what should be sort of core steady-state kind of CapEx? And is there any further stake acquisition in your existing acquisitions that you may look to do this year, which may result in funds outflow?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [101]

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So the first thing is on the business combination and purchase price accounting, if you would look at our published results in the segment page, we have called that out separately. And in this quarter, the effect of all the acquisitions have come on a full quarter basis. So this is what you can expect going forward for the rest of the year for the existing acquisitions.

But having said that, there has been one small acquisition in New Zealand, which actually got closed on July 1. So there will be some extra charge on that in the second quarter, which will then be the stable base for the rest of the year for the existing acquisitions.

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Garima Mishra, Kotak Securities (Institutional Equities) - Research Analyst [102]

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So just to clarify, these charges will recur for the remainder quarters of the year as well?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [103]

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So these charges will recur till the -- till we actually complete the buyout of 100% of those acquired entities.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [104]

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So some might go off next year once the SXP buyout is done. Some will go off when Henderson buyout is done, so on and so forth.

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Garima Mishra, Kotak Securities (Institutional Equities) - Research Analyst [105]

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Right. And that was the second part of the question also. When do you do all these buyouts? And what kind of outflows should we expect for that?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [106]

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So if you will have a look at our annual report, we are also required in respect of all such acquisitions to estimate the maximum amount we will be required to pay for the future purchase of the remaining shareholding, and we have discounted it to its present value in March 2019. So in the consolidated statements, you will be able to see those disclosures for each of the acquisitions which we have made and for which we have not yet been in position of 100% of the shareholding.

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Garima Mishra, Kotak Securities (Institutional Equities) - Research Analyst [107]

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Good. And some estimation of core CapEx?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [108]

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So as far as the normal recurring CapEx is concerned, I believe we should be looking at -- we generally look at something in the range of INR 50 crores to INR 70 crores. Of course, that's normal [recurring] CapEx.

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Operator [109]

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The next question is from the line of Devang Patel from Crest Wealth Management Private Limited.

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Devang Patel;Crest Wealth Management Pvt. Ltd;AVP, Research, [110]

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Sir, you spoke about high IRR that you look for in acquisitions. Can you also talk about what kind of benefits or synergies do these acquisitions bring to your existing operations? Or when you do future acquisitions, what are you looking to add?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [111]

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So again, just to elaborate on why we do acquisitions in the first place, one of the key strategies behind M&A is to acquire geographical presence. Especially in security and FM, there are a lot of regional players who are quite strong and who are -- who have decent levels of compliance or corporate governance. So that is one. And even though SIS is like #1 in India in both -- in security and #2 in FM, our market share is still less than 5%. And there are lots of small local players out there who are quite decent operators. And as I -- just like I was saying earlier, West is not a big segment for us. And so we would like to increase our presence in the western part of India. Just like we did Dusters a few years back, our FM segment was quite weak in the West and South. So Dusters added geographical muscle there.

So geographical penetration is one of the key strategies.

The other is acquiring skill sets, where some of these businesses will have a particular specialization in a particular area which we want to acquire, like the [car] facility management or health care FM. That is one.

And as far as synergies are concerned, synergies occur more in terms of some of the SG&A, in terms of you tend to do a lot of integration at the back end. A lot of back-office processes tend to become common. There are a lot of brand synergies which are available. And similarly, there are pricing synergies and sharing at the (inaudible) levels as we are bidding for tenders, for RFPs. Even having like sometimes 2 players is -- or 3 players is very important when you submit for RFPs or tenders. So synergies are there as well, whether it is BD or sales or costs and overheads.

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Devang Patel;Crest Wealth Management Pvt. Ltd;AVP, Research, [112]

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Right. What kind of margin levers would you have post acquisition? So for the acquisitions that you've done last year, what kind of margin increases can you look forward to?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [113]

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Yes, so the...

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [114]

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Yes. So the current quarter of the results has a full quarter effect of all the acquisitions which have taken place in the previous year. So you can assume that this is the consolidated EBITDA and profit for the full quarter for all the acquisitions, including the organic base business.

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Operator [115]

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The next question is from the line of Sudheer Guntupalli from AMBIT Capital.

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division - Associate of Technology [116]

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Congrats on a good set of numbers. I just want to know your expert views on the February 19 judgment of the Supreme Court around PF contributions. I understand there is a review petition currently pending in the tax court on this. But assuming that judgment actually stays, can there be a transient impact maybe, a 1-year kind of an impact on our cost structure on a like-to-like basis, especially in the managed services contracts that we -- managed services kind of contracts that we offer, at least before you'll be able to pass it on to the customer in the next round of contract renegotiations? And I'm asking about the prospective application of this judgment rather than the retrospective application.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [117]

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So I presume you are referring to that judgment which talks about what allowances are to be included for computing PF and what allowances are to be excluded for computing the PF contribution. Am I right?

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division - Associate of Technology [118]

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Yes, Devesh, that's right.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [119]

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Okay. So we've -- we're having this internal review of the impact of the judgment. We have had a couple of legal opinions also which we have taken on, how it impacts us or how it does not impact us. And generally, we see that there is not much impact on our practices and processes because we try to capture -- there have been some surplus in the past from the PF department as to what should be the basis of contributing PF, whether it should be minimum wages, whether it should be the gross, whether it should be all allowances, whether it should be different allowances and everything. And what we've been trying to -- what we've tried to do over the years is try and have maximum compliance with the spirit of those surplus in the past. And as a result of that, what we see is that the impact of this Supreme Court judgment is likely to be not material to our numbers and our tax.

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Operator [120]

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(Operator Instructions) The next question is from the line of [Amal Maurya] from [Alpha Alternative Advisors].

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Unidentified Analyst, [121]

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Just wanted to understand a little bit more on the operating leverage part, I mean, which is pretty much visible from the last 4 quarters. I mean just wanted to understand, I mean, what are the key levers which we are seeing in the operating leverage and how they should pan out? Because if I see 4 quarters, on an incremental revenue, we had seen an exponential uptick in the margin on incremental revenue and like-to-like EBITDA on a year-over-year basis. So what is that leading to?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [122]

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Look, I think it's a little bit difficult for you to arrive at a direct correlation between revenue growth and EBITDA growth.

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Unidentified Analyst, [123]

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So I'll tell you how I had arrived. Like if I see your year-over-year revenue on this quarter, it's like INR 397 crores kind of revenue on which we had got EBITDA of INR 50 crores, which was like INR 28 crores on a year-over-year basis, same quarter -- I mean, last quarter, [38%, INR 4 crores].

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [124]

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Yes. So let me -- just to go back and to see a bit, last year Q1 was depressed a bit because of -- we had to take some write-offs in that quarter. (inaudible) provisions and some debtors which went bad. So leaving that -- so that's why the 70% increase in EBITDA, which you see Y-o-Y, it's not like a full picture, right?

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Unidentified Analyst, [125]

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Correct.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [126]

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The base was depressed a bit. But that being said, put apart, I don't think you can draw a direct correlation between that, saying, okay, 1% revenue growth would lead to 50% increase in EBITDA because the -- there are multiple things. One is there are always investments which you keep doing into newer verticals, newer businesses, into technology, into offering new solutions. There are always costs which are incurred in transactions you do, new entities which come on to your fold. And sometimes, for instance, a minimum wage provision happens. You start paying your employees right away, but there will be a month or 2 of delay by the time the revenues catch up. So the multiple -- it's not easy to draw direct correlation between revenues and EBITDA. That's why we prefer to work with a broad EBITDA percentage. And as we said, 6% to 6.5% for India business and 5% to -- 5.5% to 6% for international business, is something we're comfortable with. One quarter it can be plus 3%; can be minus 3% a quarter. But we're not overly fussed about that. I think the overall range is what we're comfortable with in that bucket.

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Unidentified Analyst, [127]

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Okay. Sir, can I -- if I can just extend this question, like barring the contract manufacturing -- I mean, contract employees, what would be the core employee cost for our -- I mean, company as a whole?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [128]

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So we don't have any contract employees, all our employees are (inaudible) and we have full statutory compliance and contribution for every employee. So there is no concept of a contract employee as far as the India business is concerned.

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Unidentified Analyst, [129]

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Okay. So meaning even the security guards are also on your payroll?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [130]

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Exactly, all of them are on the payroll, have a proper registered ID, have a proper database here, are registered with the PF authorities, with the ESI authorities. Their contribution goes off every month on a regular basis. That's a standard practice we have.

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Unidentified Analyst, [131]

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Okay. So let me rephrase it. Like, I mean, how many employees -- I mean, like what would be the quantum which are non-billable employees in your system?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [132]

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I think across -- let's look at the India business, across the system, we are now anywhere between 3,000 to 3,500 employees who are, as you would call it, non-billable.

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Unidentified Analyst, [133]

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Okay, 3 to 3,000 employees are non-billable employees. And the approximate cost for these employees would be?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [134]

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Can we take all these questions offline? I think they so too detailed for this conference call.

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Unidentified Analyst, [135]

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Sure. Sure. Okay.

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Operator [136]

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(Operator Instructions) The next question is from the line of Sheetalkumar Shah from IDBI Capital Markets & Securities.

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Sheetalkumar Shah;IDBI Capital Markets & Securities Ltd.;Head, PMS, [137]

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Sir, could you just elaborate further on your M&A strategy? You say that India itself offers a huge scope. I mean, we have less than 5% market share. But at the same time, you are also doing acquisitions, though they may be little in terms of size, in say, New Zealand, Singapore and other geographies. So in terms of geography, whether you would restrict yourself to Australia and New Zealand and Singapore market or you have a target of other geographies as well and India also and what kind of the size of the acquisition that you would be looking at?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [138]

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Yes. As far as the international is concerned, I'll take that part, and I'll allow Vamshi to handle the question on the India piece. Internationally, we are looking to stay in the Asia Pac region because we believe the Asia Pac region is going to be the fastest-growing growth engine in the security industry worldwide. The share of the -- or the power share of security services clearly shifting from Europe and North America into Asia Pacific. That is where the action is, and that is where we will continue focusing our efforts.

Within the Asia Pacific region, also we will only be in those countries which have stable, predictable and compliant processes and procedures being followed by both the regulators and the industry players. The market size, the market should also be significant, and we will seek to get into the top end of the market and not at the lower end of the market. So we look to seek to buy, if at all, someone in the top 5 or 6, which we can rapidly use to move to #1 or #2 in the market. But it has to be a country which has stable policies, well-documented and well-regulated policies and procedures across the industry, industry players are keeping compliant and follow those regulations and having a sense of predictability on those regulations. Those are the only countries we have looked at in the past, and Singapore is an ideal example of such a country. New Zealand being a sort of an adjunct to Australia was a natural part of the Australian business to grow into. And at this point, I would -- can say we are restricting ourselves to these countries only.

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Sheetalkumar Shah;IDBI Capital Markets & Securities Ltd.;Head, PMS, [139]

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Okay. And for India region?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [140]

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Yes. So I think as I said earlier on this call, our strategy is for M&A, as you have asked, your first question was, it's primarily around getting greater geographical penetration of 2, 3 micro markets, building skill sets in a few particular sectors which we are bullish on. And overall, what we've [done] is build partnerships rather than we just acquire someone. We tend to buy 50%, 60% of companies, then give an exit to the promoter through an earn-out mechanism, where their exit is linked to EBITDA achievement or EBITDA margin, that their interests are aligned with ours. So our -- in all acquisitions we have done, have -- are clearly can be mapped against each of these, SLV, Uniq or Rare, have -- can be tagged with each of these strategies that I've just outlined.

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Sheetalkumar Shah;IDBI Capital Markets & Securities Ltd.;Head, PMS, [141]

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And sir, in this M&A strategy, through this inorganic growth, would how much comfort you have in terms of leveraging your balance sheet, to what extent?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [142]

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So as we've said that, at this point, our net debt-to-EBITDA ratio is 1 to -- is 1.4. I do believe that's a comfortable ratio at this point. As we said, this is -- we'll be sitting within that 1 to 1.4 range. If at all we have to borrow money and do an acquisition, this could slightly increase, but we do not believe this is going to go beyond 2 on a steady-state basis at this point.

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Operator [143]

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The next question is from the line of [Aman Sharma] from [Aman Investment Consultants].

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Unidentified Analyst, [144]

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Just looking in the quarter in terms of (inaudible) right now also, I see promoters' holding has been decreased. May I know the reason our -- I mean, in the future also are you looking to decrease it?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [145]

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No. I think in this -- I think probably I think last quarter, so in the last quarter in March, there was a 1.05% or so of the promoter holding which they had to liquidate for some personal needs. But there's nothing which is planned for the near future. Yes. And even that was done to comply with the minimum for public shareholding requirement of 25% public shareholding.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [146]

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It was just over 75%, and so they took the opportunity to bring it below 75% to make it compliant with the norms.

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [147]

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So probably we can have one last question before we end the call. So if there are no questions, I think I'd just like to hand over the call to Devesh for his final closing remarks.

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Operator [148]

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As there are no further questions, I'll now hand the conference to the management for closing comments.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [149]

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Thank you, everyone, for participating in the call and thanks for your questions. They were very useful to us, and as we said that if there are any further questions, Vamshi can be contacted, and he will be only too pleased to provide any information he can.

I would lastly like to say that at SIS in the group, we are focused towards strengthening our market position across the various verticals and geographies we are present in. With a stable government being reelected in India and expectation of important labor reforms, we believe that these reforms will galvanize the process of formalization of the sector. And it would likely minimize leakages and enhance the wages and working conditions of the employees in this sector. If such a thing happens, SIS will be a direct beneficiary of these changes, as and when they are rolled out. And we would also continuously seek to enhance our market share over the next few years. With this, I would like to conclude. I would like to thank everyone for joining on the call. I hope we've been able to respond to your queries adequately. If there are any further queries, as I said, you can always get in touch with the Investor Relations team, headed by Vamshi, and he will be only too pleased to answer any further questions you have. Thank you very much.

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Operator [150]

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Thank you very much.