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Edited Transcript of SECR.NS earnings conference call or presentation 25-Oct-19 7:30am GMT

Q2 2020 Security and Intelligence Services (INDIA) Ltd Earnings Call

NEW DELHI Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Security and Intelligence Services (INDIA) Ltd earnings conference call or presentation Friday, October 25, 2019 at 7:30:00am 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

* Rituraj Kishore Sinha

Security and Intelligence Services (India) Limited - Group MD & Director

* 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

* Alok Deshpande

Edelweiss Securities Ltd., Research Division - Research Analyst

* Kashyap Pujara

Axis Capital Limited, Research Division - Head of Research & Executive Director of Strategy

* Ronak Vora;AUM Fund Advisors LLP;Equity Research Analyst

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Presentation

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

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Happy Dhanteras to everyone. We're glad to have you on board for the second quarter earnings call for the SIS Group. I'll just hand over the call to Mr. Rituraj Sinha, who will make some opening remarks. We already uploaded the earnings presentation to the stock exchanges and to the website. And Rituraj will make some brief opening remarks before we open up the floor for questions.

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [2]

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Hello, everyone. Good afternoon. Very warm welcome to our Q2 FY '20 earnings conference call. Along with me, I have Mr. Devesh Desai, CFO; and Mr. Vamshidhar Guthikonda, President for M&A and Investor Relations. I hope everyone has had an opportunity to look at our results. The presentation has been uploaded on the stock exchange and also the company website, www.sisindia.com.

We are extremely happy to report that SIS Group has ended first half of the financial year FY '20 with a solid second quarter. We crossed INR 4,000 crores revenue for the first half of the year and the monthly revenue run rate is at INR 747 crores, which is a very steep increase from the INR 670 crores monthly revenue run rate at June.

With this, we have now achieved a quarterly CAGR of 5.9% over the last 10 quarters, which is a testimony to the scalability and also the predictability of our business model. The EBITDA has grown even faster to end of first half of FY '20 at INR 248 crores for H1 FY '20. This also amounts to a quarterly CAGR of 7% over the past 10 quarters. And all this has happened despite the economic headwinds that we are witnessing in India at the moment. Quite clearly, this reinforces the predictability of our business and the resilience of the demand of security services and facility management services. In fact, all our business units have delivered strong revenue and profitability. Our consolidated revenues for the second quarter of FY '20 stood at INR 2,089 crores, which is a quarter-on-quarter increase of 4% and a year-on-year change of 23.6%. Similarly, our EBITDA was at INR 124 crores for Q2 FY '20, which represents a Y-o-Y increase of 62%. SIS International margin has seen a very significant uptick, and this has been due to the aggressive focus that we've maintained since the FY '19 result. You would be very happy to know that it has moved up from 4.6% FY '19 to 5.7% for the first half of FY '20 for all of SIS International. If you look at India Security and FM businesses, they continue to operate between 6% and 6.5% EBITDA margin, which is what we have been sort of trying to maintain.

As regards to the acquisitions, we are very happy to share that all our acquisitions that are getting integrated fairly smoothly into the SIS. We have spent quite considerable time on integration and consolidation and we reported last quarter about the standout performance of the DTSS acquisition. I'm very pleased to say that even SLV, Uniq, Rare and also Henderson, which is the Singaporean acquisition are pretty much tracking in line so far with the investment case.

We will talk a little bit more about these acquisitions and investments as they complete their 1-year post-investment. So this will be a part of our subsequent quarterly updates.

Lastly, our return ratios, I mean, I've mentioned several times in the past that for SIS, the most critical metrics that we track are 20% growth, at least a year-on-year basis; 20% plus of return on equity and 15% plus OCF to EBITDA. So just commenting on the ratios itself, they are holding up quite nicely. We are currently at 22.6% return on net worth. This is despite a very large hit on account of noncash items in interest and amortization due to PPA treatment by acquisitions. Our leverage levels continue to be quite comfortable at 1.4x net debt-to-EBITDA. Again, a quick reminder, if you compare the global peer set, listed peer set for security and FM companies of our size, $1 billion-plus, if you look at the Google peer comps, they are all maintaining net debt-to-EBITDA level of 2.5x, broadly. We believe that we will continue to be around the 1.5x or below range, hopefully, and this is extremely essential from a capital efficiency standpoint. As regards to our cost of capital, we are maintaining an average cost of capital of 7.5%, which is pretty decent.

With those opening remarks, I now open the floor for questions. And I request my colleagues, Mr. Devesh Desai and Vamshidhar to kindly pitch in with the answers.

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 Ronak Vora from AUM Advisors.

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Ronak Vora;AUM Fund Advisors LLP;Equity Research Analyst, [2]

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Congratulations for a very good set of numbers. This is really a sort of macro question, which we had, from a strategy perspective, what is the sort of debt levels that you guys see comfortable with the business of this nature, given that it's low EBITDA margin, and there are some pressure sometimes, wage revisions come in, et cetera. Is there an absolute debt level you're comfortable with in a ratio form or is there a plan to bring down net debt with the cash flow that you are generating from these businesses over the next 3 to 6 months?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [3]

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Well, from a global standpoint, as I mentioned, the global benchmark that listed peer group like G4s or Securitas or Brinks and Prosegur and ISS maintain. If you look at their numbers historically, for the last 10 years of listed performance, they have maintained 2x net debt-to-EBITDA gearing. Most of them are around 2.5x mark at this point in time.

Having said that, I think SIS is looking at 1.5x net debt-to-EBITDA is -- as our sweet spot, not that you could sort of get exactly there all quarters, but that is our sweet spot to answer your question. And we believe 1.5x net debt-to-EBITDA is essential, especially because of the capital efficiency and the return on equity side of things. We run an annuity business, revenue is rather predictable as you have seen in the last 10 quarters since listing. EBITDA margin profile also is fairly stable. It's not double-digit EBITDA margin business. But then again, this is a growth and ROE business, not so much a double-digit EBITDA margin business as such. So basis all these metrics, we're just following the global benchmarks and being a little bit conservative against that, trying to do 1.5x net debt-to-EBITDA, not 2x.

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Ronak Vora;AUM Fund Advisors LLP;Equity Research Analyst, [4]

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Just a follow-up to that, Rituraj, what would be your M&A strategy? Are you done with it? Are you constantly looking for more? What sort of size are you looking at? What sort of areas or geographies are you looking at?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [5]

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Well, M&A, hopefully we're not done with our M&A strategy. I mean, if you look at, again, the global sector trends, M&A pretty much becomes a part and parcel of the development of security and FM companies as they cross the $1 billion mark. So we're not doing anything completely new. It's a tested template which we are following. Coming to the specifics of FY '20, I don't see any more acquisitions happening. That's because our focus has predominantly been on integrating the acquired entities. And that's extremely critical as well because our investment threshold is 22% IRR. And we want to maintain that sort of performance benchmark for these 5 acquisitions that were done in the last year as well. What do we acquire for? We basically acquire for getting market share consolidation in a geography or penetrating a new customer segment or acquiring a service capability that we didn't have. So quickly, if I was to say, we acquired DTSS predominantly we wanted because we wanted to penetrate the FM vertical, which we were not very strong in, and you know the numbers for that DTSS has pretty much delivered what it was supposed to. SLV and Uniq are good examples of acquisitions to consolidate market share in the lucrative Gurgaon NCR market and the Bangalore market, which are the 2 biggest markets for security solutions in India, growing at over 30% year-on-year. Rare is an example of acquiring for service capability. We didn't have a very good health care FM program and Rare predominantly specializes in health care FM, and that's why we acquired Rare. So I'm just trying to give you examples of why we've done these acquisitions that we've done.

Going forward, I don't see us acquiring much in FY '20, but obviously, we will look at deals in FY '21, and we are building towards that. In terms of geographical focus, India takes priority, quite clearly. But yes, I think I've answered all your questions, I guess.

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Ronak Vora;AUM Fund Advisors LLP;Equity Research Analyst, [6]

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So the question on more some of these slow growth geographies like Australia, New Zealand, Singapore, why would you be better off allocating capital over there rather than buying something more in India, in the adjacencies that you mentioned?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [7]

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Well, we look at M&A from a return perspective completely. So even as acquisitions in, say, Singapore or Australia or New Zealand are not in high-growth markets, but then growth is one element that determines returns. So -- I mean, even if you look at the SXP acquisition that we will hopefully report on in the subsequent quarters, even as it's been in a slower-growing market, single-digit growth market, as long as it's delivering more than 20%, 25% IRR, it's a good investment case for us, and it adds capability. Not to mention that assets acquired overseas allow us far greater flexibility in terms of leverage capacity. Targets books can be leveraged for acquisition finance, multiples are lower, acquired assets are far more stable, and acquired assets are able to deliver cash positive or contribute to the OCF of the company overall. So there's good and bad, but you can argue it both ways. But SIS Group looks at acquisitions from an IRR perspective and not just from a growth opportunity.

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Ronak Vora;AUM Fund Advisors LLP;Equity Research Analyst, [8]

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And my last question is, is anything to be read in terms of commentary about the Qantas contract in your Australian subsidiary, potentially going away? How large is it? And anything -- some more light that you can throw on?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [9]

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So I think that's an input that we put out just to let you know that there's been a fundamental change in the regulation. In Australia, there was no equivalent of a CISF. In India, we have CISF to do screening at airport terminals. In Australia, Qantas, as an airline, did their own screening. And we are the preferred vendor for Qantas. Now as Qantas is giving back the screening authority mandate to airport owners, obviously, our business with them is under review, which will see a reduction over time. But it's not something that would completely crash the SIS International story or sort of make us rethink why we are there in Australia. I think aviation will see a little bit of a hit, but then other segments are picking up. So I think on a net-net basis, it will compensate.

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Ronak Vora;AUM Fund Advisors LLP;Equity Research Analyst, [10]

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Can you just remind us the size of the Qantas business today?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [11]

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Qantas business in Melbourne, which is being handed back, is worth $14 million, which will likely discontinue at the end of calendar year '20. So that's almost 1.5 years with us. Again, the Brisbane business, which is at stake, is around about $10 million odd. This would probably get determined earlier in calendar year. So I mean, there's a bunch of contracts that will move back and forth. We have just advised you in advance of this development. But you must also take on board the fact that we are bidding also for the airport contracts. We might be losing out on the Qantas Airline contracts, but we would be bidding for the airport terminal contracts in Melbourne, Canberra and other places. So I think it's just advanced intimation, but it's not alarm bells, I don't think so.

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Ronak Vora;AUM Fund Advisors LLP;Equity Research Analyst, [12]

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But you think that you will be able to maintain Australian revenues with some growth this year and FY -- and sorry, calendar '20 as well, with some of these falling away, but the new business, and hence, you should be net-net able to grow that business?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [13]

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We have for the last 11 years, and there has been a lot of contracts that have come and gone. It's part of business.

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Operator [14]

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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 [15]

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Congrats on a great set of numbers. A couple of questions from my side. Firstly, I just wanted to extend the question from the previous participant. In your annual report, you had mentioned that the contribution from aviation in the international security business is about 15%. Again, if you could give some color on how much of that is at risk? Because I think, 15% potentially, we're talking about INR 500 crores coming from the aviation sector for the Australian business. Any more color that you can quantify for us, Rituraj?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [16]

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It's Vamshi here. Yes, right. I mean, aviation contributes around 12% to 15% of our Australian revenues. But as we've indicated in the earnings note, there has been a change in the policy of Qantas on operating for these terminal screening contract. Because of which, the contracts are reverting to the airport owner, and because the airports are all privatized in Australia. So the airport owner, in some cases, has separate agreements with other vendors. I mean, in a nutshell, I mean, just to reiterate what Rituraj was saying, it's not like all this business will be at risk. Some of it might go away, some we'll be able to retain. And to counter that, actually there are newer terminals we are bidding for in Canberra and Melbourne. So I think -- all in all, I think we should be -- net-net, we should be okay within what we lose and what we retain and what we potentially will win. I think we should be okay in terms of the overall revenues and how we are positioned there.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [17]

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Sure. And second question, Vamshi, on facility management. You've seen phenomenal growth in that business and more so since Dusters has come in the picture. Now -- and this growth trend of more than 30% for the past few quarters. Going forward, are we looking at this growth trend returning or sort of reverting back to a more sustainable 15%, 20%, which is what the category is growing at? Or you expect over the next couple of years to sort of be able to clock a similar growth rate in facility management?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [18]

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But just to answer it, obviously, as the company becomes increasingly larger, I can't keep growing at [30%] every year. I think that's quite understandable. I think the industry as a whole, and our segment as a whole, does offer potential to grow significantly faster than the security business because of what we discussed many times earlier about slower outsourcing, which has happened in the past, which is poised to take off because industry is still largely in-sourced. A lot more adjacencies you can get into within the overall facility management space, the hard facility management business, which is still untapped, and the formalization story, which is obviously happening as we speak. So I think growth rates over time, obviously, will taper down to more reasonable level. But it will definitely be much higher than the security business. I mean, without getting into specific numbers, I think that's what is in a nutshell we can guide towards.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [19]

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Sure. Just one last question, Vamshi. Also, Rituraj mentioned at the start that this year we have been able to, sort of, get margins, which were significantly higher in Australia than compared to the previous years. Now, even if you were to strip out the margins or the margin contribution from the Singapore entity, Australia, we have still seen about 50, 60 bps or a little more of a margin expansion in Australia. Can you just help us to understand what exactly have you gone about creating this efficiency and margin? Has it been any change in the credit period side? Or is it more of a cost rationalization? I just wanted to more -- see more color on how this margin expansion has taken place.

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [20]

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Well, I think Devesh has been leading that effort, so I'll request Devesh to take that question.

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

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Yes. So Devesh here. What we've been doing since the last year, we've been consciously working on a series of profit improvement measures in Australia. We had a relook at all our rostering, our master rosters, efficiency of our rosters, all our recruitment, vacant positions over time whether there's training, which is unpaid or paid training. So a whole bunch of measures we've been doing contract by contract, state by state, area by area. And what happened each state has had a series of -- a list of initiatives and improvements which they have to undertake. And right from the top to the bottom every month and every fortnight those initiatives are tracked and make sure we are delivering on those initiatives. That's actually led -- on-the-road activity has led to a significant improvement in the margins over there.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [22]

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Sure. And is there any more scope for this margin to go up? I mean, excluding the Singapore entity, just purely in Australia, do you see this room for improvement continuing over the next 2, 3, 4 quarters? Or do you think that most of it has sort of captured in this quarter?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [23]

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No. No. There's still some more work remaining, but obviously, we see that there will be a few more improvement initiatives taken over the next 3 or 4 quarters. There are 1 or 2 bigger ones, which are taking a bit more time to actually get results, but those are the ones which will have to deliver better results over the next 3 to 4 quarters.

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [24]

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Alok, if I may just pitch into what Devesh was saying. I just want to reemphasize the point that security as a business globally in a market environment like Australia, if you look at comparable markets in the U.K. or U.S., does perform around about 5.5% EBITDA margin. So that's the broad range where this would settle at. That's the first point. The second point is, I would once again say that you must look at this business not purely from the potential of EBITDA margin to continuously go up and improve. You must also look at it from the growth and return on capital or return on equity perspective. Australia, on a stand-alone basis, does a return on capital employed of over 60-odd percent. So you have a business that has a single-digit growth, a 5 percentage margin profile, but a 60% return on capital employed and a 15 million to 20 million per annum free cash generation. So I mean, that's a holistic view that one should take? Yes.

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Operator [25]

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(Operator Instructions) The next question comes from the line of Abhijit Akella from IIFL.

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Abhijit R. Akella, IIFL Research - VP [26]

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First, just wondering, the improvement in cash flows, because of the lower [MAT] payments that you've talked about, how significant benefit could that be?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [27]

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Hello, Abhijit. I'll have Devesh answer that question.

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

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So Abhijit, the MAT trade has not actually led to the improvement in the cash flows. It's a stronger DSO management at our security business in India, which has led to a reduction in the DSO in security business in India, which has actually led to the cash flows improvement.

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Abhijit R. Akella, IIFL Research - VP [29]

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Yes. Sure. I appreciate that. But I think in the presentation, you've talked about the fact that the new tax rates require you to pay less MAT and therefore, the cash tax outgo will decrease from what you've been paying so far. So I was just hoping to understand the quantum of that benefit going forward.

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [30]

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Okay. So, I'll take a few seconds to explain that mechanism to you. As a business, we are subjected to the holding tax TDS. And so what happens is at the end of the year, the MAT we have to pay is less than the TDS, so we actually end up getting a refund. So the effect of the MAT -- lower MAT for this year, potentially, will not get in into the cash flows so quickly. So on a balance sheet basis, yes, I'll have to have a lower MAT but as far as the actual cash inflow business is going to take a bit more time to actually flow back into my books.

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Abhijit R. Akella, IIFL Research - VP [31]

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But let's -- I mean, if you look forward to fiscal '21 next year, I think on average, we've been paying maybe a little over INR 100 crores as cash taxes, from the cash flow statement. So now with this reduction in the MAT rate itself, is it possible for you to bring that -- bring down that cash tax outgo on a sustainable basis?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [32]

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Yes. We actually, this year, we have tried to bring down the ongoing tax outflow by -- and because of our lower tax payments for the last few years, we have consent from the tax department for the customers to reduce the tax reduction quantum from our invoices. So there has been a small improvement in cash flows on that account this quarter. And we hope to have a lower tax outgo on an ongoing basis over the next couple of quarters using that advantage.

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Abhijit R. Akella, IIFL Research - VP [33]

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Okay. And on the P&L, we've got a large tax benefit this quarter as well, 20-odd crores. So what explains that? And what should we expect from a full year basis as well as for next year?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [34]

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So yes, under no -- I mean, we all know that there has been a change in the corporate tax rate regime, and option is given to companies to opt for a lower tax regime. Now in that lower tax regime, fortunately, the 80JJ exemption is continued to -- is allowed to continue to be availed by companies opting for the lower tax regime also. Now having said that, in our case, while we have the option to go to the newer tax regime, take the lower rate and continue the 80JJ benefit without any MAT, what we've done is because we're still evaluating the overall impact of the new tax rates versus the old tax rates and what our tax prospectible profit and future profit is likely to be, we have continued providing for the income tax provisions and the MAT provisions under the old rates. So there's no change in the accounting for the tax expense this quarter.

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Operator [35]

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The next question is from the line of Kashyap Pujara from Axis Capital.

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Kashyap Pujara, Axis Capital Limited, Research Division - Head of Research & Executive Director of Strategy [36]

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Congrats for a decent set of numbers. And I just wanted to check on a couple of aspects. One is, if you can just elaborate regarding the working capital in the India Security business? In your presentation, I think you had pointed out that the DSO has gone down slightly. But could you actually give us a sense as to whether you see further room of this kind of going down over time? And where you see a sustainable level of DSO for the domestic business?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [37]

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Well, Kashyap, the working capital or the DSO management in security business has been pretty good this quarter, and we reported almost 125%, 130% OCF-to-EBITDA for the Security Solutions business in India. But then again, that comes at the back of a fairly subdued collection cycle at the end of Q1. So these things will continue to happen in the business. You can see that there's a very clear pattern of slowdown across industrial sectors. And that will -- that's not hurting our demand for new services, but that will naturally put pressure on the collection cycles. Having said that, we believe that a good range for security solutions business, DSO is between 65 days and 70 days DSO, and for the FM business, around the 75-day mark. So that's where we try and maintain our collection cycles. The FM business collection cycle is a little bit higher because a large part of our revenue comes through the likes of JLL and CBRE and the facility management IPCs. So that sort of puts a time lag on the collection cycle of FM. But broadly, you should model around 65 to 70 for security and around 75 days DSO for FM.

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Kashyap Pujara, Axis Capital Limited, Research Division - Head of Research & Executive Director of Strategy [38]

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Sure. Helpful. And one more question was regarding the margin, while you -- while I understand that we are pretty recession resilient and growth is not an issue, we will grow, and ROC is also pretty robust. But from a margin perspective, given that we have actually done all the investments on the ground in terms of the branches, which are already in place. While I understand you're saying that 5.5% is a stable margin on a global basis, but for us, given that the branches are there, shouldn't we expect some operating leverage to at least take us up to a particular level before we stabilize? So maybe our fair range could be higher than what the global points there are.

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [39]

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No. So let me just reclarify that. I said 5.5% is a good benchmark level for SIS International. For SIS Indian operations, that include security services and FM, 6% to 6.5% is the right bracket. Coming to the question of operating leverage, I think it is definitely contributing on the India side of the business. We have shared with you this time that the per branch monthly revenue on the Security solutions business has gone from INR 1.3-odd crores in March to INR 1.7-odd crores in September. So that material change in revenue per month, per branch is definitely going to contribute to operating leverage. And that's where the -- between 6% to 6.5% will come from.

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Kashyap Pujara, Axis Capital Limited, Research Division - Head of Research & Executive Director of Strategy [40]

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Fair enough. Fair enough. And lastly, what -- could you share what is your monthly [hundred] for India security and India FM at the current point in time, [hourly]?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [41]

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So roughly INR 295 crores-odd for India security, and INR 108 crores for India FM. That is September exit.

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Operator [42]

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The next question is from the line of [Akash Mangani] from BOI AXA Mutual Fund.

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Unidentified Analyst, [43]

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I just wanted to clarify on the Australia business. So what is the quantum of revenue loss that you could have because of the aviation contract? I think you mentioned INR 500 crores is the overall revenue coming from aviation for the Australia business, and within that...

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [44]

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I guess, it's more like INR 400 crores.

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Unidentified Analyst, [45]

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Okay, INR 400 crores. So all of that INR 400 crores is at risk? Or within that, there is only a couple of terminals which are at risk? Can you...

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [46]

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So that's a very good question. Just to clarify, because I think I can see that showing up on my stock price probably. The overall aviation exposure is INR 400 crores, out of which less than half is with Qantas, let's say, INR 200 crores, out of which less than half could potentially go off, which is INR 100 crores. And like I said, the timing of revenue going off would vary. And like I already explained, some of the contracts might go off at the end of this calendar year, FY '19. And most of it would go off at the end of calendar year '20. So we are talking about this INR 100 crores adjustment between now and Q3 of FY '21. So even if everything was to go off and nothing was supposed to be won to compensate that, even as we are bidding for all these contracts to the airport operator itself, it would make a 1% or maybe a 1.5% impact on our revenue line.

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Unidentified Analyst, [47]

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Okay. So that's -- that's a 1% to 1.5% [per quarter.] And how often in the last 8, 10 years, have you witnessed such transactions happening, where the client takes back a certain piece of the business?

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Vamshidhar Guthikonda, Security and Intelligence Services (India) Limited - President of M&A and IR [48]

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Yes. So just to answer, Akash. In Australia, we have a 97% contract retention. In India, we have 94%. So a set of contracts do go away every year. That is a part and parcel of the business. But I think what we favor, because aviation was a reasonable-sized vertical, it makes sense to call out, right, rather than just be called out later on that we didn't indicate to the investors, so it's better to be upfront about it.

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [49]

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And also, I think this is not a routine contract change. I mean, this is also called out for a specific reason that the Australian regulation change is changing, right? So Qantas, which was an airport screening authority, will no longer continue to be an airport screening authority after some 40 years. So it's not completely in our hand or it's not completely because of service issues or pricing issues. I'm sure that we will win back a large part of this business through the airport owners. All the airports in Australia are privately owned. But I mean, like Vamshi was mentioning, this is a prudent intimation, even as it's not going to completely crash Australia numbers or something or SIS consol numbers. But we thought we need to notify about this change because it's more regulatory in nature.

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Unidentified Analyst, [50]

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So there is no risk to the other INR 100 crores of Qantas revenues? You said INR 200 crores overall Qantas, INR 100 crores could potentially go off. So the balance INR 100 crores, is there a risk to that also over the next few quarters or years?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [51]

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Well, as of now, we have no intimation regarding that. And I believe that Qantas will only migrate these contracts out in airports, where there is a large airport operator involved like the Melbourne Airport Corporation or the Sydney Airport Corporation. In regional airports, smaller regional airports, where there's 3 flights a day type, there is no large airport operator to take over.

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Operator [52]

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(Operator Instructions) The next question is from the line of [Suhani A.], an individual investor.

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Unidentified Participant, [53]

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Sir, you had mentioned in the beginning of the call, my line was not clear -- so clear, so I just wanted you to repeat. You had mentioned that the revenue would go up by some 20%. And this assumed that the return ratios would be maintained. So if you could repeat that, sir.

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [54]

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Well, that's not specific comment for this year. But generally, the 3 metrics that SIS Group focuses on, which are a part of KPIs for my CEOs and then downstream to regional heads and branch heads and the like; the 3 metrics that we track are year-on-year revenue change, maintaining our return on equity and operating cash-to-EBITDA. These are the 3 key metrics that SIS runs its business on. And generally, if you look at the last 5 years, also, the current performance, we try and maintain at least a 20% year-on-year growth, greater than 20% return on equity and greater than 50% operating cash-to-EBITDA. So that's a more general statement about how you should view SIS, not particularly talking about this particular financial year as such, even as I believe that this year could be better than our benchmark metric.

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Unidentified Participant, [55]

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Okay, sir. So return on equity, 25-plus.

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

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Yes, around 22% to 25%.

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Unidentified Participant, [57]

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Okay, 25% to 30%? And operating cash-to-EBITDA, sir?

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

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50%.

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Operator [59]

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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 [60]

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Yes, Rituraj, so just a question on the Indian Security business. With all the different verticals or sectors that we cater to, where do you think that, in terms of demand, where the most resilience has been seen, and where do you think that the 2 or 3 sectors can be sort of susceptible and you can see potentially some crack in demand that might happen over the next couple of quarters or in the coming year, given the slowdown that we are in? If you could just give some color on how we are looking at the Indian Security in terms of your consumer sectors or client sectors?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [61]

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Well, that's a pretty complicated question to answer. I mean, so far, are we seeing sort of a complete drying up of our sales pipeline? Not really. We haven't witnessed any material change. In fact, June to September, it's an uptick. Monthly run rate has seen a significant uptick. But yes, there is always sectors which are slower. I can sense clearly that telecom is -- telecom customers are in bad shape cash flow-wise and additional business [buy-wise] they would be considering reviewing all their costs. I can see the same for banking. But then e-commerce is booming. They are the new data centers coming up, new warehouses coming up. So they continue to roll very well. Interestingly, there's a lot of uptake on the hospitality side, there's a lot of uptake on the hospitals and health care side of things. These sectors seem to be completely unaffected. IT and BPO completely unaffected. They continue to roll as is. So I mean, there's always -- Alok, the good thing about this business is that we sell to B2G, we sell to B2B, and we are sector agnostic completely. So there's always years where mining or power takes a downturn and something picks up and then telecom is taking a downturn right now and something else is picking up. So it's a part and parcel of how our business operates.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [62]

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Sure. So as a basket of sectors you are comfortable, is that what you're saying?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [63]

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Yes, as of right now, on Q3's revenue pipeline, I don't see anything to worry about. I think we are pretty well set with INR 750 crores of monthly revenue at the end of September. I think we are pretty well set as an annuity business for a strong full year performance. As regards to EBITDA, if you look at almost INR 250 crores H1 EBITDA. 2 years back, our full year EBITDA was some INR 225 crores. And this year, for the half year, we have done INR 250 crores. So again, very good outlook for the year-on-year change on the EBITDA number as well. Like I said, on the PAT line, there is going to be significant cash flow benefit as a result of the change, may not be on the effective tax rate, but on the cash flow, we will do pretty well. So overall, I think H1 is the strongest we've had in the last 2 years at least.

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Alok Deshpande, Edelweiss Securities Ltd., Research Division - Research Analyst [64]

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Sure. So -- and any update on the Mantech contracts. Last time you had given us an update on that and how that is progressing?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [65]

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Well, that's the interesting piece. As the cost of manpower goes up, there's a direct correlation on people opting for greater use of technology. So our overall security bill or the spend of the customer on security is not declining, but the mix of that invoice is changing. And that actually is margin accretive for us. And because a lot of this equipment is also on amortization basis, customers clearly understand there's a shorter-term contract means a higher charge. So it's helping on stickiness, it's helping on longevity of contracts, it's helping on margin accretion. So that's a good story. And hopefully, Vamshi will be publishing one of the knowledge series reports on our migration from service to solutions with greater use of technology across security and FM. So I think that, that would be a pretty interesting read for you guys.

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Operator [66]

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(Operator Instructions) The next question is from the line of [Weber Gugati] from Ashmore.

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Unidentified Analyst, [67]

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Do you expect the tax benefits to continue in the coming quarters?

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [68]

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Devesh, like take that up?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [69]

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I couldn't hear exactly what the question was.

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Unidentified Analyst, [70]

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Do you expect the tax benefits to continue in the coming quarters?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [71]

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Yes. As I said that under the -- even under the revised tax rate and the tax norms, the specific tax benefit or significant tax benefit available to us on 80JJ is allowed to continue even under the new rates. While all the other exceptions have been downgraded, if a company opts for the new rates, this is one exemption, which has continued in the new regime. So this benefit will certainly be able to avail, whether we stick to the old rate or the new rate.

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Unidentified Analyst, [72]

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Could you quantify this benefit in the coming quarters, like how much would it be in total?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [73]

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I think you can take a similar guidance to what is this quarter because we are averaging out the benefits over each quarter. So you can look at the same benefit, which is incurred in this quarter, maybe a 5% or 10% here and there, but it will be largely similar to what we have in this quarter.

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Unidentified Analyst, [74]

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So this will continue for the next 2 quarters?

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Devesh Desai, Security and Intelligence Services (India) Limited - Group CFO [75]

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Yes, this will continue whether we opt for the old rate or the new rate. It will continue. It might as a the quantum of -- if you opt for the new rate, it is quite possible that this quantum, they have moved down from a 35% competition to a 25% competition if you adopt the new rate. So that's it.

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Operator [76]

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(Operator Instructions)

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [77]

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Is seems most are done here, so it's Dhanteras, in any case. We can take a break. Is that okay for everyone?

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Operator [78]

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Sure, sir.

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Rituraj Kishore Sinha, Security and Intelligence Services (India) Limited - Group MD & Director [79]

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Okay. So with your permission, I would like to conclude and would like to thank all of you for joining the call today. I hope we've been able to respond to all the queries you had. Let me reassure you that the aviation in Australia is not going to change anything materially for the SIS performance basis H1 result of INR 4,000 crores in revenue and INR 250 crores in EBITDA.

I think we are very well set for a robust H2 and a solid FY '20 result. I wish you all very happy Dhanteras and a Happy Diwali. If you have any questions regarding SIS, please feel free to reach out to Vamshi and the Investor Relations team. Thank you very much, once again.