Riding high on demand, security services

The growing demand for security by large corporations and retail establishments across India is spurring investor attention in the security services industry, one of the country's fastest growing.As a number of companies that offer trained guards, cash storage and transportation as well as electronic surveillance raise risk capital and prepare to buy out smaller players, there is a wave of consolidation that is expected to change a hitherto fragmented industry, which is estimated to employ some 50 lakh.

"The security services industry is reaching an inflection point," said Rituraj Sinha, group chief operating officer of SIS. The 33-year-old, who was earlier a Londonbased banker, took over the reins of the company in 2002.

"Institutional investors believe that they can actually get handsome returns (in security services), instead of just getting back their capital which is the case so often in India," said Sinha, whose company raised Rs 500 crore earlier this year from private equity fund CX Partners. A combination of private equity investments and entry of foreign players is already providing a more organised avatar to this industry currently valued at Rs 23,000 crore.

Experts said the rising interest in the industry, which is broadly divided into segments ranging from manpower and guarding to cash logistics and electronic security, is based on expectations that its size will nearly double to Rs 40,000 crore by fiscal 2015. At present, the organised sector accounts for about 30% of the market. "We are definitely going to see a lot more consolidation," said Amitabh Jhingan, partner of third party merchant account services at EY. "This will be driven by two factors: the entry of global players and demand for companies with a national presence."

Delhi-based SIS has provided security for Tata group employees during the company's pull-out from the disputed site at Singur in West Bengal in 2008. SIS also provided manpower guarding services to automobile manufacturer Maruti at its plant in Manesar following rising tensions between the company's management and its workers.

"We would not have invested unless we anticipated internal returns on investment of about 25%," said Ajay Relan, managing partner of CX Partners, an investor in SIS. CX Partners' investment in SIS provided the company's previous investor DE Shaw with a lucrative exit.

In Mumbai, Topsgrup, one of the largest security services providers in India—it is promoted by 42-year-old Diwan Rahul Nanda—has mandated merchant bank NM Rothschild to scout for fresh investors. A deal will see current investors Rakesh Jhunjhunwala, ICICI Ventures and Everstone Capital, who together own about 38% of the company, exit the firm.

While manpower guarding dominates the space, cash logistics and electronic security are also fast-growing services. "In the cash logistics space, all operators carry up to Rs 15,000 crore per day, and up to Rs 5,000 crore in their vaults. Therefore, there is no doubt that we have reached scale," said R Venkatesh, chief strategy officer at CMS Info Systems, which runs a cash logistics arm, CMS Securitas. Private equity major Blackstone owns a majority stake in CMS.

Affluent clients seeking uncorrelated returns can now consider an investment that’s so alternative it was once a symbol of the counterculture: cannabis. After citizens of Colorado and Washington voted in 2012 to make legal the personal, non-medical use and possession of limited amounts of marijuana by adults, investor interest in this nascent industry spiked. “Since the election in November, we haven’t made an outbound investment call. Investors have been calling us,” says Michael Blue, chief financial officer of Seattle-based Privateer Holdings, reportedly the first private equity firm to invest in the legal cannabis sector.

Although federal law prohibits cultivating hemp and growing, selling, possessing or using marijuana, this seems to be having little effect on investor enthusiasm. And cannabis investors aren’t just aging hippies driving rusted Volkswagen buses plastered with peace signs. “We’ve been raising money from high-net-worth individuals, single-family offices and third party payment gateway,” says Blue, who has an MBA from Yale. “Our investors are from all over the country and all over the world. They’re from red states and blue states. We have ranchers in Kansas, physicians in California, Wall Street executives in New York and farmers in the Midwest.”

Both marijuana and hemp are varieties of the plant species Cannabis sativa, but the two are genetically different and further distinguished by their uses and chemical profiles. Marijuana is grown primarily as a recreational or medicinal drug. Hemp has been cultivated for thousands of years to produce a wide variety of industrial and consumer goods and is being touted today as a green alternative to many products.

Legal medicinal marijuana sales in the U.S. are projected to hit $1.5 billion this year, according to Medical Marijuana Business Daily, an industry publication that reports on legislative and financial developments. In 2014, the first marijuana retail stores are expected to open in Colorado and Washington, which could generate about $1 billion in revenue during the first full year the facilities are in operation. The combined national medical and recreational markets are expected to generate state-legal marijuana sales of $3 billion in 2014 and $6 billion by 2018.

The Hemp Industries Association says the current market for hemp products in the U.S. is about $500 million. Many hemp products are available for sale in the U.S., but beacuse of the federal prohibition on growing hemp, the seeds, oil and fibers used to make them are all imported. If hemp is legalized, the domestic market could ultimately be 10 times the size of the market for marijuana, but it’s expected to be slower to take off since hemp hasn’t been grown on a commercial scale in the U.S. for over 60 years.

In the short term, investors are focusing on the marijuana market because it’s larger right now and the infrastructure is in place in many states. Industry insiders are betting the market will continue to expand no matter what happens legislatively on the federal level. In 2016, the citizens of several states, including California, are expected to vote on whether to allow recreational marijuana use.